Single currency plunges ahead of FOMC | U.S. core inflation news will comfort the Fed

Yesterday saw a dramatic fall in value of the Euro against the U.S. dollar, as traders positioned themselves in anticipation of the Federal Open Market Committee (FOMC) interest rate decision later in the global day today. A rise of 25 basis points is widely expected by all markets and commentators, so the U.S. dollar was being bought across the board during the North American session yesterday.

In truth, the Single Currency had got more than a little bit ahead of itself, on the back of the so-called “failure to deliver” on the part of the ECB in its monetary policy statement of December 2^nd, when it did actually accelerate Quantitative Easing (QE), only not to anything like the extent that the Forex market had been expecting. Prior to that particular meeting, the Euro was well on course to fall to 1.05 dollars. At its peak yesterday it touched 1.1060 (see chart above).

Because of the Fed meeting later, today has the potential to deliver extreme short-term volatility in the Forex markets – when and if the U.S. main interest rate is increased, it will be the first time this has happened in over nine years. So great care is called for in trading.

U.S. core inflation news will comfort the Fed

Official inflation figures released yesterday show that core U.S. inflation, the Consumer Price Index (CPI) with volatile energy and food prices excluded, showed a satisfactory annual rise of 2%, which is the Fed’s target inflation rate for a sustainable economy. The full inflation story is less benign, with the headline rate coming in at only 0.5% rise year-on-year. However, most economists believe that the fall in the price of oil and other commodities will eventually come to an end, and headline inflation will then start to move closer to the core rate. In the meantime consumers are experiencing something of a windfall because of lower prices for fuel and other related consumables. That, in itself, cannot be bad for the economy.