Currency markets consolidate ahead of the Federal Reserve meeting next week. Speculation that the Central Bank would unwind asset purchases faded as the August NFP report was weaker than anticipated and July employment was revised downward. Still Reuters and Bloomberg surveys among well-known economists indicate that there is more than 60% chance for asset tapering, but the pace is expected to be lower than would have been should the NFP was in line with projections. We would expect the Fed to announce reduction of its QE program by $10B to $75B.
The US dollar index rose to resistance at 81.71 as the US Jobless claims dropped to 7-year low the previous week but that cannot be sustainable because not all claims were processed due to computer systems update in two states according to the US Labor Office. The precious metal is getting softer on asset tapering expectations since its role as inflation hedge is losing importance as the US Fed move towards a tighter monetary policy. The XAUUSD breached key support at 1356.15 yesterday and slipped as low as 1307.85. The gold is likely to continue lower in the longer term as the Fed may continue its hawkish stance depending on macro. Also other Central Banks may follow Fedís path with Bank of Canada most likely the first one to further tighten due to recent employment data.
Earlier on Friday Japanese Industrial production was revised upward to 3.4% for July, up from previous estimate at 3.2% suggesting that recovery is picking up. The latter, increases chances for the sales tax hike from 5% to 10% that the Japanese Government plans to apply. The USDJPY jumped to 99.96 earlier today, slightly below key cap at 100, the Japanese Yen in our view is going to weaken further amid highly accommodative monetary policy and dovish stance while at the same time Fed is diverging towards tightening.
Elsewhere, the British pound against the Euro was steady in 1.5830/1.5776 range near its 7-month high amid investors expect unemployment rate to drop earlier at 7.0% which is the threshold for rising interest rates. Upside development prevails in the GBPUSD and we consider more likely the pair to climb toward fresh highs in the near term. Looking ahead, investors are watching mainly US Retail Sales release and US Consumer Confidence indicators but also keep an eye on Euro group meetings.