FX Commentary

A quiet and range-bound Asian session today with no notable data to report. Eur$ trades steady after taking out 1.3150/1.3100 barriers overnight. Next barrier level to watch is at 1.2900. For the London session, keep an eye on Italy’s 5year BTP auction. Overall, flows remain concentrated in $Asia, led by real money Usd buying. $INR continues to be focus in EM space with 1s $INR opening sharply higher at 54.10/17 (53.85/90 NY close). Agent offers suspected at 53.75 to 53.60 in spot with the usual persistent oil and importer bids keeping the downside supported. Intervention volume is estimated at 250mio Usd. $Krw trading better offered into the London open, with local spec accounts selling out of Usd longs.
Overnight, FOMC kept policy unchanged as expected. The committee made few changes to the statement, providing a more positive tone on economic growth and labor market conditions. On the inflation front, the committee chose to drop the language saying that a dissipation in energy and commodity price pressures would contribute to a moderation in inflation in favor of simply stating that the FOMC expects that inflation will settle "at levels at or below" those consistent with the dual mandate. Chicago Fed President Charles Evans again dissented against the decision to stay on hold, favoring "additional policy accommodation at this time."

The combination of still-significant risks to the downside, the characterization of unemployment as elevated, the forecast for inflation to settle at or below mandate-consistent levels, plus the dissent from Chicago Fed President Evans, leads us to conclude that FOMC maintains an easing bias. While we do not foresee asset purchases as part of our baseline outlook, we do not fully rule them out, given that any slowing in the economy could tip the committee in favor of more accommodation.