Talking Points

• FX Majors Consolidate vs US Dollar in Quiet Overnight Trade
• FOMC Rate Decision in Focus as US Data Dims QE3 Outlook
• UK CPI, German ZEW Data Unlikely to Prove Market-Moving

The major currencies consolidated in choppy narrow ranges against theUS Dollar overnight as markets digestedyesterday’s breakneck volatility amid disappointment following last week’s EU leaders’ summit. Eurozone event risk is relatively limited over the coming 24 hours, with only a pair ofbond auctions from Spain and theEFSFstanding out on the docket. The bailout fund will aim to sell up to €2 billion in 91-day paper while Spain is set to auction off 12- and 18-month bills. On balance, the short tenor of the debt on offer is likely to keep any market reaction to the outcome relatively short-lived.

Looking further ahead, theFederal Reserve monetary policy announcement will enter into the spotlight. No policy changes are reasonably expected from the rate-setting FOMC committee but the language of the statement following the meeting ought to prove telling. Indeed, it is surely becoming harder for policymakers to glaze overthe increasingly chipper pace of US recovery with the pulse of economic data steadily improving through the second half of the year and economists’ GDP forecasts showing that – in contrast to the Eurozone and China (two of the three major global output engines) – theNorth Americanbehemoth isexpected to seegrowthaccelerate next year. In fact, mere hours before the Fed announcement, theRetail Sales report is set to show receipts growth accelerated in November.

With this in mind, the possibility of a return to quantitative easing (QE) seems decidedly unlikely over the near term. The implications of a FOMC policy statement alluding to this increasingly apparent reality are somewhat unclear however. On one hand such an outcome may open the door for a push higher in US Treasury yields, reflecting thehefty US budget deficit and American politicians’ apparent inability to do anything about it at least until after next year’s Presidential election, driving theUS Dollar higher. On the other, it would likely prove supportive for broader risk appetite by bolstering hopes that the world’s top economy will help offset headwinds to global demand from elsewhere (especially Europe), weighing on the safe-haven greenback.

On the European data docket,UK Consumer Price Index figures are set to show the annual pace of inflation slowed for the second month to 4.8 percent, reinforcing the dovish lean at theBank of England but offering little new information that could unleash major volatility. Likewise, theGerman ZEW Survey of investor confidence is forecast to show sentiment soured for the tenth consecutive month, which is hardly supportive but also not particularly surprising, meaning its ability to meaningfully move theEuro is likely limited.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

---Written byIlya Spivak, Currency Strategist forDailyfx.com

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