Last night decision by the Central Bank of Turkey to push interest rates aggressively higher certainly caught markets unawares judging by the reaction of both currency and equity markets in the wake of last night’s decision. The central bank increased the overnight funding rate from 7.75% to 12% and more than doubled the one week repo rate from 4.5% to 10%. The bank stated that the policy stance would be maintained until there is a significant improvement in the inflation outlook. This much more aggressive response than markets had anticipated prompted a sharp jump in the Turkish lira, and in the process gave a significant boost to equity market futures, after the US close. As such we can expect a higher open for European markets this morning. The Turkish central bank’s decision, following on as it has from this weeks earlier decision by the Reserve Bank of India to hike its benchmark rate by 25 basis points it appears that emerging market economies are grabbing the proverbial bull by the horns to defend their currencies. These measures it would seem are calming concerns about a run on emerging market currencies, but it also raises serious concerns that the internal shock of these rate hikes will curtail any growth there is in the short term, and in turn hurt profitability of any companies who do business in these markets. Given the recent turmoil in emerging markets there had been a belief on the margins that the Fed might be minded to consider holding off on a further tapering of asset purchases at today’s FOMC meeting. This would seem to make such an outcome much less likely and the prevailing wisdom would continue to be that the Fed will trim off another $5bn each from their monthly asset purchase total of US treasuries and Mortgage Backed Securities, starting in February. While this is the consensus view, market participants would do well to remember that a large majority of them got it wrong in September when they thought the Fed would taper and didn’t, and they also got it wrong in December when the Fed did taper, and the consensus was that they wouldn’t. If we were to look at US 10 year bond yields right now there doesn’t appear any indication that a taper is priced in, given that yields are sitting just above one month lows, so a pause by the Fed wouldn’t be a surprise to bond markets, though the reaction of other markets might be different. In the event we do get a taper the key question would be as to whether it was unanimous, and how the Fed tweaks its forward guidance, and in particular whether the FOMC is concerned by last months disappointing payrolls number, and whether the mixed nature of recent data and any bad weather effect has caused a re-evaluation of their view on the US economy. There is no press conference scheduled for Ben Bernanke’s last ever meeting as Fed Chairman and it is to be expected he will go quietly with little fanfare, content in the knowledge that he has left the bank with the winding down program under way. EURUSD – the last three days have seen lower highs with the risk that a failure to break the 1.3700 level, could eventually see a push lower. Long term trend line resistance remains at 1.3865 from the all time highs at 1.6040 and ultimately this remains the key obstacle to a move through 1.4000. Support now looks pretty solid around the 1.3500 area and only a move below negates a potential retest of the highs. GBPUSD – the failure to break below the 1.6480 level has prompted a pullback after Friday’s drop from the two and half year high at 1.6665. Whilst we remain below this high the key day reversal remains valid, and continues to suggest we may not see a move towards the 2011 highs at 1.6745. Only a break below 1.6480, would suggest a move towards 1.6300. EURGBP – Monday’s failure at the 0.8300 level has prompted a pullback but the bullish engulfing day remains valid whilst above the 0.8200 area. As such the potential for a move towards key resistance at 0.8330 remains, as well as trend line resistance from last August highs at 0.8395. The major support remains at the 0.8160/70 level which is the 61.8% retracement of the entire up move from 0.7755 to the 2013 highs at 0.8815, and a new one year low. USDJPY – having found support at 101.80 this week the current rebound needs to see a move beyond 103.80 to suggest a move back towards 105.50. A close below 102.00 the 38.2% retracement of the up move from 96.55 to the peaks at 105.50 could well see a move towards the 101 area, the 50% level. CMC Markets is an execution only provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.