FOMC minutes suggest QE3 as Sterling Dollar reaches 3 month high

Tom Tong23/Aug/2012Currency Updates

USD

Yesterday evening the Fed’s minutes of their last FOMC rate-setting meeting were released. The Fed is set to ease US monetary policy in the near future, unless we see a drastic change in economic indicators.

General consensus from analysts believe this to be a fairly unclear and makes it difficult to decipher at this stage whether QE3 will happen as the US economy has shown positive signs of late, particularly in the labour and housing markets. However, yesterday we did see the Congressional Budget Office warn of a double dip recession unless the looming fiscal cliff was tackled, with spending cuts and expiring tax provisions at the end of 2013.

Analysts have suggested that this fiscal cliff will amount to roughly 600bn USD, due to hit in January by law unless Congress can reach a deal.

Additionally, the CBO has stated that if Congress took no action before January 1st, the series of tax increases and spending cuts would plunge the US economy into a double dip recession, shrinking at a pace of 0.5 per cent in 2013, with unemployment rising from 8.2 per cent to 9.1 per cent.

The dollar sold off across the board following the minutes, as is typically the case with loosening of monetary policy, the the dollar index declining 0.4 per cent in the day to 81.5 points.

EUR

The euro benefitted yesterday from the Fed’s inclination towards further easing as investors sold the US dollar and bought the euro.

Further bolstering the euro, investors remain optimistic that the ECB will soon announce its plans for the purchase of peripheral eurozone bonds in order to bring down borrowing costs for the likes of Spain and Italy. Furthermore, rumours persist that Angela Merkel will give the green light to introducing a cap on yield spread between German bunds and peripheral government bonds; further bolstered by comments made by ECB executive board member Jorg Asmussen on Tuesday.

The euro yesterday reached a fresh seven-week high against the dollar following the release of minutes, rising roughly 0.4 per cent.

Today, we see some new eurozone manufacturing data released, most crucially from Germany. These will provide a strong test to the euro after its recent rally.

GBP

News was light on the macroeconomic front. However, most action in sterling was triggered by actions in the US, as investors poured out of the US dollar, with the pound rising roughly 0.5 per cent against the dollar in the day, making it roughly 1.1 per cent higher this week, and reaching a new three-month high.

Sterling’s direction has been largely driven by developments in the euro zone this week, enabling it to shrug off poor UK data and rise in tandem with the euro against the dollar. Many investors are expecting the ECB will intervene next month, buying Spanish and Italian bonds to ease their borrowing costs.

However, analysts said growing worries about a poor UK economic outlook could limit its rise and market participants may look to take profit at levels.

On Wednesday, Bank of England policymaker Adam Posen stated that the UK was stagnating and that if the eurozone situation got worse or if the bloc broke apart it would overwhelm the UK economy.

Data on Tuesday showed Britain’s public finances unexpectedly veered further off-track in July while a survey revealed a sharp fall in factory orders this month as demand for consumer goods dropped.

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Written by Tom Tong

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