Fed set bold interest rate policy in the US as markets focus on fiscal cliff wrangling

Tom Tong14/Dec/2012Currency Updates

GBP

Sterling slipped from a six-week high against the dollar on Thursday as investors took some profits after the Federal Reserve eased policy and attention switched to U.S. fiscal problems. Uncertainty surrounds sterling as it is said to strengthen against the dollar in coming weeks, however, if Bank of England policy makers hold off from signalling further monetary easing in Britain.

With no more UK data due this week attention will now focus on wrangling over U.S. budget problems, the so-called U.S. fiscal cliff, a combination of tax cuts and spending hikes due to kick in at the beginning of 2013.

A Confederation of British Industry factory orders index came in at -12 in December from -21 in November. A below zero figure indicates that the majority of manufacturers recorded declines in their orders

EUR

The euro advanced versus the dollar after the Federal Reserve announced its new US Treasuries purchase program. Despite the generally positive mood, the euro has struggled to move higher against the Dollar and instead it entered in a consolidation phase.

European leaders headed into the last summit of a crisis-hit year to thrash out the euro’s future on Thursday, full of Christmas cheer after clinching deals on bank supervision and funding for Greece, hoping to cap it all off by setting out ways to plug holes in the eurozone’s construction that have been brutally exposed during the bloc’s three-year debt crisis.

Greek Prime Minister Antonis Samaras exclaimed that “Grexit was dead”, meaning the prospect of Greece leaving the eurozone was no longer possible after ministers released bailout funds to avert bankruptcy.

After a buy-back programme designed to reduce Greece’s debt mountain, Eurogroup head Jean-Claude Juncker said a first payment of 34.3 billion euros would be flowing to Athens “as early as next week.” followed by another 14.8 billion euros in the first quarter of next year.

USD

The US Federal Reserve will keep interest rates at close to zero until unemployment falls below 6.5 per cent in a historic change to monetary policy. It’s the first time a large central bank has tied it’s interest rate policy directly to the state of the economy. The changes mark an all-out effort to revive the stuttering economic recovery.

Starting next week December 17th, auctions will be begin on four consecutive days. The U.S government will sell $35 billion in two-year notes. $29 billion in seven year debt and $14 billion in five-year Treasury inflation Protected Securities. The federal open Market Commitee said as of the Dec 12, the central Bank will buy Treasuries at a pace of $45 billion a month from next year. This move by the Fed, will follow the end of “Operation Twist”, a $667 billion programme in which the central bank has sold each month about $45 billion in short term Treasuries to buy an equal amount of long term debt.

The U.S. consumer price index is estimated to have risen 1.9 percent in November from a year earlier, down from a six- month high of 2.2 percent in October, according to a separate Bloomberg poll taken before today’s data.

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Written by Tom Tong

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