As we mentioned yesterday this week is all about the dollar and then sterling. For today, the focus is on both. For the dollar, it’s with the start of the two day Fed meeting, with results announced tomorrow evening. The main focus is on the statement and the potential for a change in language, which could prove to be another boon for the dollar if seen. Before then, inflation data in the UK is seen at 08:30 GMT and is expected to fall further to 1.5% (from 1.6%) on the headline rate. But this will be a side-show to the main event of the week on Thursday, with the referendum on Scottish independence the results of which should be seen early Friday. With the result still too close to call, sterling volatility is assured, with the options market reflecting this in the elevated levels of implied volatility, especially on the shorter maturities.
Sterling has moved below the 1.62 level in early trading, with the dollar generally firming on the majors. AUDUSD is once again flirting with the 0.90 level, with 107.39 still in the sight-lines on USDJPY (a six-year high). The other point to note is the underperformance of emerging market currencies so far this month, with the Russian rouble, Brazilian real and South African rand leading the way on the downside. Emerging markets were always seen as vulnerable to the Fed moving towards a tightening stance and even though we are some way off from that, we’ve already seen the reaction in the interest rate markets, with US bond yields rising, pushing the 2 year yield close to the highs of the year. So far though the reaction has been relatively muted, in comparison to the scare that perpetrated emerging markets May to early September of last year when the market had its first scare on Fed tightening (tapering). The subsequent indications and language have served to soften the blow, but the recent moves suggest it cannot be totally eliminated from emerging market currencies.