With the excitement of yesterday's central bank events out the way, the markets are now mulling over what the USD strategy should be from here. The initial sell-off after the release of the FOMC statement failed to gather enough momentum to break through the key support levels, and the DXY bounced sharply afterwards to end up higher on the day around 76.40 (having touched a low of 75.82 after the statement). Strangely, despite reassurances from 3 different central banks yesterday that their assessment is one of an improved global outlook, equity markets across Europe are very heavy this morning, USDJPY is down nearly 1% at 90.40, and oil continues to suffer after yesterday's plunge; in fact it feels a lot like the markets are gearing up for a wave of risk aversion. The fact that the Fed have now timetabled an intended exit from QE should provide some respite for the downbeaten USD, but there's still that overarching feeling that USD weakness is likely to be a prolonged theme going forwards and that this may just represent the long overdue correction we've been waiting for. Aside from USDJPY, the main mover this morning has been GBP; after a dazzling run yesterday that was doused only by the USD's widespread recovery, BoE Governor King managed to kick the currency while it was down by stating in the Newcastle Journal that the pound's drop would be helpful for rebalancing the UK, and that furthermore the UK banking sector is not in good shape. GBPUSD plunged towards 1.6200, and with EURUSD largely unchanged on the day, EURGBP ramped up to just above 0.9100 - its highest levels since April this year. After the hawkish Norges Bank statement yesterday that discussed the possibility of a hike this month, and other economies such as NZD already out of recession in Q2, GBP seems extremely vulnerable to longer term weakness as we expect the driver of FX markets to gradually shift to reflect diverging paths of monetary policy going forward. Notably today is the start of the G20 summit in Pittsburgh, and according to a document leaked to Reuters this week, the main agenda item is rumoured to be discussion of a plan of mutual assessment than ensures policies pursued by individual G20 countries are collectively consistent with more sustainable and balanced trajectories for the global economy. However, this would seem a particularly tricky plan to negotiate given the differing situations and rates of recovery for individual countries. It won't be the first time that concern has been raised about the G20 proposing a coordinated stimulus withdrawal that might be perceived as premature. Nevertheless, policy makers have been careful in previous meetings to avoid potentially inflammatory statements that focus on specifics or timelines, and we feel it's likely they will continue instead to emphasize the importance of working together on a sustainable recovery plan. There is also certain to be discussion on bankers' compensation and incentives, but nothing likely to rattle the markets.
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