Market keenly awaits FOMC decision on tapering as sterling loses ground

Tom Tong18/Sep/2013Currency Updates

GBP

Yesterday saw sterling lose ground against the greenback following the release of inflation data from the UK. With regards to the month of September, Core CPI figures came in at a decrease of 0.1% less than the consensus . This is the lowest we have seen this figure for the month since 2009. Annual CPI figures did not surprise by decreasing 0.1% as expected.

The pound also saw a decline against the euro retracing on previous gains from the close of last week following the positive jobless data out of the UK. On a broader note the IMF has published a paper outlining the major risks of large government debts suggesting that even advanced economies with high debt levels are more risky than commonly perceived.On the other hand the UK gained credit for use of its medium term budget plans with the IMF going on to state that without such estimates countries are more prone to error in their economic forecasts.

In contrast with George Osborne’s policies we have seen that London house prices have increased by 10% in a year. This left the chancellor denying that a bubble is being created within the capital’s housing market.

This morning the main focus will be on the release of the Bank of England’s minutes released shortly after talks are held regarding the positioning of the interest rates.

EUR

The Euro was relatively quiet yesterday as we saw small moves off the back of lower than expected UK inflation print and a positive set of German data. Attention is firmly focused away from the Euro and on the Fed announcement later today regarding tapering of Quantitative Easing in the US.

As usual a mixed batch of Data was out of the eurozone yesterday. Hopes for strong German growth and a potential eurozone recovery have surged on upbeat market confidence according to data published yesterday. German ZEW shot up 7.6 points to 49.6 this month. These figures have been released just days before the German general election over the weekend.

This positive news comes after trade figures released yesterday indicated that both imports and exports for the continent slumped in July. After seasonal adjustments exports declined 1.6% while imports declined by 0.1% when compared in June. Despite technically leaving recession analysts believe these figures are hardly a signal of a recovery and could have a knock on effect for ECB president Mario Draghi who could be pushed to reduce interest rates even further.

In other news Greece should return to economic growth in 2014, ending 6 years of recession European boss Jose Manuel Barroso predicted yesterday. However Prime Minister Antonis Samaras warned it will take another 6 years for living standards to return to pre-crash levels.

Little to no data of merit out of the eurozone today.

USD:

At 7pm tonight (6pm GMT) the Federal Open Market Committee (FOMC) will release its decision on the management of interest rates as well as whether it will taper the $85 billion a month injection into the US economy. Markets have been heavily watching this figure as it will have a large effect in both the American economy as well as in many of the emerging market economies.

The FOMC will be looking at many recent core data points which have been released recently. These include the Labour Departments’ Consumer Price Index which edged up 0.1% last month after rising 0.2% in July. The CPI relates to a market basket of retail goods in the United States and is a key measure of Inflation.

the majority of analysts believe that Fed chairman Ben Bernanke will scale back purchases of long term bonds by $10bn and will keep rates as close to zero as possible. Due to the forward guidance policy, which Bernanke had previously implemented, many believe that the market has already priced in a $10bn scale back. If this does happen, the market should react positively. Should tapering, however, be delayed it will come as a surprise and it will be interesting to see how the market should react.

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Written by Tom Tong

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