USD
Despite most Fed officials saying they thought the Fed would be going ahead with tapering, some doubt began to creep in, in the run up to the FOMC. This was partly because of the negative impact of withdrawing stimulus on fragile emerging markets, but also due to the recent run of poor data, in particular NFPs. However, these doubts proved to be unfounded as the Fed continued on its course of cutting back easing, announcing a further 10bn taper on Wednesday. There was no mention at all of the emerging market turmoil of the past few days in the policy statement and little change in the wording. The exception was the Fed slightly upgrading its assessment of the U.S growth, saying the economy had “picked up” rather than “is expanding at a moderate pace.” The dollar was actually little changed versus most counterparts after the statement, although it gained slightly against the euro and fell versus the yen.
EUR
The euro fell initially on Wednesday after emerging market concerns hit investor sentiment again. The breakdown occurred after the South African central bank increased interest rates to try to help support the falling value of its currency, the rand. Temporarily this had the desired effect but then the rand suddenly re-capitulated, falling to a 5-year low versus the dollar. The FOMC proved to be rather anti-climatic. Though volatility had been anticipated the opposite was true. It had little effect on EUR/USD except to slightly strengthen the dollar. On the data front figures were good. German Gfk Consumer Confidence showed a higher-than-expected 8.2 rise in Feb versus 7.6 expected. Euro-zone Money Supply showed a slower-than-expected rise in Money Supply (M3) in December of 1.0% y/y compared to the 1.7% expected and 1.3% increase over the last 3 months versus the 1.7% forecast.
GBP
Sterling fell slightly ahead of the FOMC on Wednesday as emerging market concerns weighed on riskier currencies of which sterling is one – albeit fringe member. On the data front, however, figures continued to support a stronger outlook for sterling, with House Price data from Nationwide showing a higher-than-expected rise to 8.8% y/y versus 8.5% expected, and 0.7% m/m versus 0.6% expected. BOE Governor Mark Carney gave a speech on Wednesday in Scotland about the pros and cons of currency union, in light of the possibility that Scotland might vote to be independent. Carney steered clear of politics but warned that a currency union was fraught with hazards, as had been shown by the example of the euro-zone. Cable was little changed after the FOMC, at which the Fed voted to keep policy unchanged, and taper a further 10bn off its monthly asset purchases.
JPY
The yen strengthened initially on Wednesday after emerging markets began to show signs of panic after the South African Rand fell to a 5-year low and the Turkish Lira tumbled, despite the Turkish central bank raising interest rates at an emergency meeting on Tuesday evening. The new bout of weakness led to a flight to safety and increased demand for the safe-haven yen. On the data front there are a large number of releases out later. Retail Sales data is expected to show a slower rise of 3.9% versus 4.1% previously y/y and a 0.7% rise m/m versus 0.6% previously. Other data will show the amount of foreign bonds bought by Japanese investors. The number fell in the previous week as investors expectations for the yen altered to a more bullish stance, reducing the potential return on any foreign investments. The yen continued to rise after the FOMC, despite the Fed continuing with tapering, and keeping the wording of its accompanying statement broadly optimistic.