US Dollar Weakens Against Crosses Ahead of FOMC

Asian equities markets are again in positive territory. Chinese markets are underperforming. EUR/USD is holding near yesterday’s closing levels. However, for now there are no follow-through gains yet. The market attention will be on the marquee event of the week, the FOMC decision and statement followed by the press conference.

The economics calendar is moderately interesting but should have little market affects as traders are positioning themselves ahead of the FOMC. In Europe, markets will look out for the EMU production data. Usually this figure is no market mover and it won’t be a game changer today. Nevertheless, after last week’s downbeat ECB forecasts, EMU growth/activity data are again on the radar of financial markets. A much weaker than expected figure might further fuel speculation that the ECB will be forced to embark for more policy stimulation early next year. In theory, this could be a negative for the euro. Of course, sentiment on risk will still have to do its job, too. The EU Finance Ministers meet on banking supervision. As such, this is quite an important issue in the process to solve the EMU debt crisis.

The euro remains weak as sentiment remains negative, it is the FOMC outlook that is helping the euro gain momentum on the weakness of the USD. Traders should not fool themselves into thinking that the euro is gaining strength and sentiment. Once the FOMC is behind and markets have absorbed the effects of Mr. Bernanke and associates, the euro is expected to return to its earlier trading range and to continue to trend downward. There have been no changes in the eurozone to support a stronger euro.

The EUR/USD remains just above the 1.30 price level.

Of course, the reaction on the equity market (global sentiment on risk) will also play an important role to decide the reaction of EUR/USD. Don’t preposition ahead of the Fed, but look to sell euro/buy USD if the EUR/USD rally fails to extend after the Fed meeting.

With the dollar in a defensive mode head of the Fed meeting, the USD/JPY managed to stay away from the recent lows in the 82.12 area. The pair basically drifted sideways. However, a positive sentiment on risk and slightly higher core bond yields kept the downside in this cross rate well supported. The EUR/JPY was a help for the USD/JPY headline pair, too. The pair has climbed this morning to trade at 82.62 as the JPY reported poor eco data with machinery orders below forecast. The weakened JPY saw the EUR/JPY traded in the mid-107.00 range.

The EUR/GBP has seen little change trading completely flat at 0.8069 in the Asian session.