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Traders sell the rumour ahead of FOMC announcement tonight.

By Alex Edwards

GBP/USD has pushed slowly higher over the last 24 hours amid a lack of any fresh or major Brexit news. The main driver yesterday morning was a sell-off in the dollar as traders sold the rumour ahead of the FOMC announcement and Fed Chair Powell’s speech later tonight. But things have settled since and investors are taking a cautious approach ahead of the main event.

In Brexit related news yesterday, minsters approved £2bn of extra cash for government departments to be disbursed in the event of the UK leaving the bloc without an agreement being approved. There are also reports that Theresa May could be willing to allow MPs to debate alternatives to her plan in January, which is a change of tack as it was currently all based on her deal or no deal.

Unless we get any Brexit related surprises today, it may be a quiet session in the run up to the Fed’s decision this evening. UK inflation data due this morning may also have an influence.

The dollar’s depreciation against most major counterparts continued through trade on Tuesday, touching a one-week low as investor’s unwound long positions ahead of today’s US Federal Reserve Policy meeting. Throughout the last six weeks the Fed has seemingly shifted course, suggesting interest rates at their current level are nearer neutral than previously signaled. Markets have been forced to re-calculate interest rate expectations amid speculation this month’s rate hike could be the last in a predetermined cycle of monetary policy tightening.

Markets will be keenly attuned to accompanying Fed commentary and affirmation that future rate hikes will be data dependent. This could prompt an increase in future USD volatility as investors react to key macroeconomic data sets markers of future monetary policy shifts, a move away from broader central bank forward guidance.

With markets pricing in a 70% probability of a rate hike today, a surprise abstention from the FOMC would prompt a sharp USD correction.

The euro moved slightly higher in yesterday, albeit range-bound ahead of the all-important Federal Reserve meeting tonight.

It’s pushed higher overnight, however, and is making a move towards the 1.14 handle in early Europe. The single currency has been supported by news in the last few hours that the EC has accepted Italy’s budget deficit plan. In all usual circumstances this news could have had a bigger positive impact on the currency, but it’s all about the Fed today, so an air of cautiousness looms in the air.

AUD, like most other currencies, made steady gains against the greenback last night as traders reposition ahead of the Fed tonight. Other than this, it’s been a quiet session and the range looks set to remain steady ahead of tonight’s announcement. AUD/USD opens in London at .7195.

The CAD remains on the back foot this morning, not helped by the continued downward pressure on oil - WTI crude oil lost 4% yesterday, that’s 12% since December 4th. Data released yesterday also showed that Canadian manufacturing sales contracted by 0.1% for the month of October to $58.2 billion, not helping the CAD’s cause either.

The currency will do well to recover today ahead of tonight’s big risk event, especially so as oil prices remain depressed.

NZD/USD has been steady overnight. NZ Consumer Sentiment printed in line with market expectations and Current Account came in weaker, but neither had much of an impact on the ‘bird’. Attentions turn squarely to the Fed tonight and so a steady range in NZD/USD is likely to ensue.