In US trade, both the euro and the pound continued to grind higher, responding favourably to the German Constitutional Court ruling which found that the ESM bailout facility complies with German law.
The ruling was one of the big event risks for the week (the other being tonight’s FOMC meeting), but was largely in-line with expectations so there was no dramatic or sustained price movements. Pleasingly for the market, there were only a handful of minor conditions attached to the ruling, such as Germany's liability must not exceed €190 billion without further parliamentary approval but, significantly, there was no mention of constitutional constraints on further integration.
Most commentators saw it as probably the most market-friendly outcome investors could have hoped for. The moves in risk currencies such as the euro and the pound were only modest however, because tonight’s FOMC decision is seen as perhaps having even greater currency implications and a more lasting effect on sentiment towards equities and commodities heading into the end of the year. While the market seems to have grown increasingly confident that the Fed will embark on a fresh round of asset purchases, there is still a sizable degree of scepticism, and no one wants to be on the end of the ‘disappointment trade’, which will undoubtedly involve dollar strength/risk currency weakness.
This risk has curbed outright enthusiasm toward risk currencies, with the stance to be either validated or proven unwarranted depending on what the Fed delivers tonight. In early Asian trade both the euro and the pound are slightly firmer than their US closing levels, currently sitting at 1.2915and 1.6120 respectively.