The past month has seen FX volatility increase for a variety of reasons and things don’t look set to calm down this week, with two key events to look forward to. The first is the Fed meeting on Wednesday, where the market is becoming more concerned that we could see a change of language in the accompanying statement. In recent years, the Fed’s forward guidance has pledged to keep rates at their current level “for a considerable time”, with this also being linked to other measures, such as unemployment. It’s already emerged in the minutes that some members are not comfortable with this language, so an official move away would be seen as a further dollar positive sign, depending how the Fed offsets it (if at all) with other changes in the statement. Overall though, this is likely to keep the dollar on a stronger footing, especially with bond yields also rising in anticipation of such a change.
The other event is the impending referendum on independence in Scotland which has instigated considerable volatility on sterling over the past couple of weeks. The pound saw some recovery last week as the polls were less in favour of the Yes side, but it remains far too close to call for the vote taking place on Thursday. Elsewhere, the Aussie continues to suffer, having briefly broken through the 0.90 level during Asia trade. Iron ore prices recovered a touch towards the end of last week, reflecting the fact that this is more than just a commodity price story on the Aussie. USDJPY rose every day last week and although we are seeing a steady tone so far, further weakness looks to be on the cards given the breakout from what has been a very tight range for most of the year. Key data and events are thin on the ground today, but this should not deter those from positioning ahead of the key events this week.