Market Mood Sours Ahead of FOMC

NEW YORK (BBH FX Strategy) -- The dollar is a touch firmer against the majors and emerging markets as uncertainties over Greece, a rise in Portuguese spreads and weak European earnings dampened the market's mood following a strong overnight session in Asia.

The euro benefited briefly from the better-than-expected German Ifo business climate index but reverted to levels around 1.296. Sterling, meanwhile, shrugged off a negative UK GDP release and is currently trading at 1.557.

The Bank of England minutes showed a unanimous vote for steady policy. Aussie core inflation was higher than expect but unlikely to deter the Reserve Bank of Australia from cutting next month, while Japan reported its first annual trade deficit in 20 years.

Global equity markets got off to a good start overnight after Apple's earnings boosted Asian shares but sentiment took a turn for the worse after the European open. The EuroStoxx is down 0.9% led by the 3% drop in tech shares. Bank shares currently down 1.7%.

At the conclusion of today's FOMC meeting, the usual statement will be issued, but what is capturing the attention of the market is that the Fed will also publish the expected path of the Fed funds rate and the expected timing of the first hike.

Last week the Fed provided templates of the tables that it will use to provide the expected timing of the hikes and the appropriate pace. These will the anonymous views of all 17 policy makers. This is important. It will not only include voting FOMC members, but all the regional presidents as well.

The Board of Governors is understaffed (5 instead of 7) and all 12 regional presidents will have their forecasts recorded. This will give the regional presidents a greater weight, but most importantly will show the range of policy views at the Fed.

In the press conference that follows, Bernanke is likely to emphasize that these are forecasts not promises.

The German January Ifo business sentiment jumped to 108.3 from 107.3 in the previous month and is the highest since August of last year. It was also better than expectations (108.3 vs. 107.6) and mainly driven by an improvement in the forward-looking component, which rose for the fourth consecutive month, and now stands 4 points above its trough in October.

Above all, this print coupled with the surprisingly good PMI readings Tuesday suggests that German economic activity will start to stabilize early in the first quarter and may begin to gradually improve from Q2.

However, the outlook for Greek PSI remains a key source of uncertainty and thus has left the euro vulnerable. We see near-term support near 1.295 and resistance near the early January high of 1.307.

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