Fed to Sort out Mixed Data

As the clock winds down to the FOMC decision, data on Tuesday showed dramatically different views on the US economy. The market is waiting for signals The Canadian dollar was the top performer while the yen lagged on buoyant risk appetite once again. Japanese industrial production is due later. A new set of Premium Insights will be issued later tonight.

The US dollar dropped 30-60 pips across the board on a soft durable goods report early in US trading. That sent EUR/USD to 1.2765 from 1.2710. Capital goods orders non-defense ex-air fell 1.7% compared to a 0.7% rise expected. Over the past three months, the metric has averaged -0.5% in a statistic that's often seen as the best proxy for business investment. It's certainly something that will have gotten the Fed's attention and could temp their assessment of the economy.

Just 90 minutes later the US dollar bounced back as consumer confidence rose to the highest since the crisis and the Richmond Fed climbed to the best levels since 2010. That erased all of the decline in USD/JPY and about half the EUR/USD move.

Consumer confidence was the bigger driver but it's a dubious indicator and correlates to gasoline prices and little else. Moreover, it was entirely driven by the 'expectations' component rather than 'present situation.'

Overall trading was surprisingly robust with the Fed looming. The market is divided on the removal of “considerable time” from the FOMC statement. Betting on a dovish Fed has been the trade for years and after this meeting it could grow clear that inflation is a larger concern for the Fed than employment and growth.

The other headline that caught our attention was from the Bank of England's Cunliffe who sounded a strongly dovish tone. He doesn't speak often and when combined with similar rhetoric from Shafik yesterday it could mean the BOE is on the sidelines for longer than markets anticipate. Cable stalled out just ahead of the Oct 20 high of 1.6184 after durable goods and then stumbled to 1.6133 after the comments.

Markets may continue to consolidate ahead of the Fed in the hours ahead but Japanese data could also deliver some intrigue ahead of Thursday's equally important BOJ meeting. Sept industrial production is due at 2350 GMT and expected down 0.1% y/y. NOTE THAT GMT IS NOW EQUAL TO LONDON until late March 2015. NEW YORK, or EASTERN TIME this week is 4 hrs behind London/GMT, but changes to 5 hrs behind London/GMT starting next week.