Position-Squaring Ahead of Fed Statement Boosts Euro and British Pound

The Euro and British Pound posted modest gains versus the U.S. Dollar on Tuesday. Despite a much better than expected U.S. Consumer Confidence report, traders mostly remained on the sidelines ahead of tomorrow’s Federal Open Market Committee meeting and Friday’s Euro Zone consumer inflation data.

Traders expect the Federal Reserve to keep intact its guidance that short-term interest rates will remain near zero for a “considerable time.” The main focus for investors will be on the Fed’s assessment of the strength of the U.S. Dollar as well as the slowdown in the global economies.

Short-covering and position-squaring by traders is helping to underpin the EUR/USD and GBP/USD. Despite today’s better-than-expected U.S Consumer Confidence report, traders were reluctant to take long positions in the dollar versus the Euro and Sterling. The data showed that a gauge of consumer confidence hit 94.5 in October, versus an 87 estimate.

In other news affecting the dollar, the U.S. reported that durable goods declined 1.3 percent in September. Traders were looking for an increase of 0.4% versus the previous report which showed an 18.4% decline. Another report showed U.S. single-family home prices rose in August, but still fell short of expectations.

December Comex Gold futures rallied on the weaker dollar. This was most likely short-covering and position-squaring ahead of the Fed statement and the Euro Zone inflation data later in the week. The charts indicate gold still has room to the downside with $1219.40 to $1211.00 the best target.

December Crude Oil futures also traded higher, mainly due to short-covering and position squaring ahead of tomorrow’s weekly Energy Information Administration supply and demand report. Traders are looking for an increase of 3.3 million barrels versus last week’s increase of 7.1 million barrels.

Overproduction and low demand have been driving prices lower. The slowdown in the global economy is likely to mean that demand will continue to fall. This makes production the wildcard. No one expects the U.S. or Russia to cut back on production which means the key producer to watch is Saudi Arabia and the rest of the OPEC members. At this time, they seem to be content with cutting prices rather than production. At some time, however, low prices may begin to make one or a few members uncomfortable which could lead to a production cut. This action would likely produce a short-lived, short-covering rally.

Don’t expect too much movement the rest of the session by the currencies or commodities since most traders are content with holding the markets in a range until after the Fed statement announcement.