Markets are generally staying in consolidative mode as traders await the FOMC announcement today. DOW ended down -9.31 pts lower at 15875.26 after failing to extend this week's rebound. Ten year yield pared back this week's gain and closed down at 2.843%. Dollar index continues to hover around 80 handle. In the currency markets, the EUR/USD is staying in tight range below 1.3810 temporary top. Nonetheless, cross selling in the EUR/CHF pushed USD/CHF below corresponding level of 0.8839 briefly. The GBP/USD extended recent pull back from 1.6465 and reached as low as 1.6216 so far. The USD/JPY recovered mildly and is back pressing 103 but is also bounded in familiar range.
Bets that the Fed would begin scaling back its QE measures have clearly risen over the past weeks as US economic data showed notable improvements. We believe policymakers would have rigorous discussions on whether to begin tapering this month. While improvement in the job market and economic recovery might have led some to believe tapering could being in December, others might prefer to gather more evidence to show that growth has taken a firm hold before reducing stimulus. We tend to expect the Fed would begin tapering in the first quarter of 2014 but won't feel surprised if policymakers start scaling back some of its stimulus this month. Note also that the summary economic projections would also be released this week.
Also, it should be noted that the decision to taper or not is not the single factor to watch for today as markets have already been prepared for that possibility. As some Fed officials urged, when Fed decides to taper, it should announce the decision together with a time table for scaling back the asset purchase program. That is, Fed would also tighten up the forward guidance to probably include thresholds for the pace of tapering. And, that could be an element that is more market moving than the tapering decision itself.
As for the dollar index, near term outlook stays mildly bearish as long as 80.49 resistance holds. The fall from 81.482 is expected to extend lower to 79.00 and below. There lies a key cluster support zone of 50% retracement of 72.69 to 84.75 at 78.72 which the index could draw support and rebound. Meanwhile, above 80.49 will turn bias to the upside for 81.48 and above to extend the rebound from 79.00.
On the data front, New Zealand's current account deficit came in wider than expected at NZD -4.78b, NBNZ business confidence rose to 64.1 in December. Australia Westpac leading index dropped -0.1% mom in November. Japan trade deficit came in wider than expected at JPY -1.35T. China conference board leading indicator rose 1.4% in November. BoE minutes will be the major focus in European session while UK will also release job data. Germany will release Ifo business climate. Swiss will release ZEW. New residential construction for US will be featured before FOMC rate decision and Bernanke's press conference.