The Federal Reserve interest rate decision will trigger further volatility on Wednesday with an aggressive cut likely to weaken the dollar.
After testing support below 1.24, the Euro secured a firmer tone over the remainder on Tuesday. There was a further small decline in Libor rates while credit-markets spreads also narrowed which curbed dollar demand even though underlying confidence remained extremely fragile.
US consumer confidence data recorded a sharp decline to a record low of 38 for October from a revised 61.4 with a sharp decline in the current and expectations components. The sharp decline will reinforce fears over the impact of deteriorating credit conditions and will maintain pressure for the Federal Reserve to cut interest rates aggressively to combat a deep recession
The Fed will be reluctant to act on individual data, but the severe stresses suggest that rates will be reduced on Wednesday which could help underpin risk appetite. The impact will be limited by the fact that markets have already priced in a reduction of at least 0.50% and a smaller reduction in rates would trigger renewed volatility.
As Wall Street extended gains sharply with the Dow Jones gaining by 10%, the Euro challenged highs above 1.27 against the dollar and it consolidated above this level in early Europe on Wednesday with a move back towards 1.28 in Europe.
