Dollar rallies following FOMC statement release, showing less dovish tone

Tom Tong31/Oct/2013Currency Updates

GBP

With no data out of the U.K yesterday, sterling was on the sidelines at the mercy of the FOMC statement and a bundle of macro data out of the Eurozone. Suffice to say that these events did not swing in sterlings favour. Yesterday saw sterling sustain losses against both the dollar and euro. Sterling fell swiftly against the dollar following the FOMC statement, widely perceived to be less dovish than expected. The FED is currently purchasing monthly, $85bn of U.S T-bills and mortgage securities, this is done with the intention of keeping the U.S recovery in check.

Sterling fell against the euro and continues to hover near 2-month lows. Euro gains were aided by the ECB. Policy makers appear to show little concern about euro strength, stating presently they have no intention of altering rates or inflation,which pleases investors, fuels euro bulls and ultimately allows the euro to continue its recent run of strength. The euro pivoted at the start of the week midday Monday, when it broke through its 200 day Moving Average, at this stage further gains are being demonstrated however resistance levels are increasingly coming into play.

Only housing market data out of the U.K today. Nationwide house price data came out 7am this morning with UK homeowners having a reason to wake up smiling- average house prices are up 5.8% from October last year. Prices in the last quarter rose at there fastest in 3 years. London prices rose a staggering 10% in one month, a flurry of buying activity has sent the property market ablaze, with petrol poured on the fire via the governments controversial Help to Buy Scheme. Naturally there is noises of a housing bubble however prices are still 7% shy of the peak reached in 2007 and both the government and BOE ensure they are keeping close watch on the situation. Either way rises bode well for consumer sentiment as home owners feel richer and are therefore likely to spend.

EUR

A mixed day of trading for the euro yesterday. The euro was up against sterling however lost gains against the dollar following the dollar rally across the board ensuing the revelations during the FOMC that they intend to keep QE at current levels for the meantime. Although the FED are coy about the exact date things may change, the general market view is pointing towards March next year. Reason being we need to see a steady flow of strong data prior to any alteration in QE.

Tons of data out of the eurozone yesterday allowed a greater peep into the overall performance of the bloc. Yesterday we saw Spanish GDP increase equally where unemployment rate is consistently dropping, albeit from all time highs. Conversely German GDP has slowed and for the third month on the bounce unemployment levels have increased. Unemployment increased by 2000 meaning overall unemployment is 2.97m which equates to an unemployment level of 6.9% However, the market seemed to shrug this off. Overall the German rise has been almost meteoric and slip ups in data are to be expected. Furthermore, the overall growth prospects for the eurozone looking increasingly attractive to investors. Consumer sentiment is at its highest levels in 2 years. It’s going to take a fairly big piece of disappointing data to stop the euro party and the market will continue to scrutinize it closely.

Hugely important data out of the eurozone today- CPI and unemployment figures.

USD

Dollar rises against sterling and euro. Up against its most traded basket, dollar index begins to show signs of strength. All eyes and ears were glued on the FOMC as we saw the release of their statement relating to monetary policy moving forward and how they intend to deal with QE. Crucially the FED elected to exclude the past tone which placed emphasis on the possible tightening of financial conditions, thus bringing forward expectations of tapering. This was against expectations, especially considering the soft NFP figures we saw last week. However, there was still little firm guidance on when the taper will begin. Furthermore, we saw budget results released. The FED will continue QE at its current levels of $85bn per month. However, they have kept us guessing as to when they will taper. With no forward guidance on a potential date we can only assume the decision reflects uncertainty about the strength of the economic recovery. The FED is handcuffed to positive consistent macro data releases and many home runs are needed prior to any change, it would be messy if QE was altered too early and the market had little faith in U.S growth, the kickback could see the FED back to square one, hence the very careful and considered approach we are seeing. The general market view is the FED will taper around next March, however they are giving nothing away.

The FED was fairly optimistic, saying the economy continues to grow at a moderate pace and the party line seems to be that the shutdown did not affect things too badly. However they continue to stress that they need more data before making a move. Encouragingly U.S budget deficit yesterday dipped below the $1 trillion mark falling to a proportion to 4.1% of GDP. This bodes well for overall growth.

Data of note out of the U.S today includes- initial jobless claims and continual jobless claims, both expected fairly flat.

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Written by Tom Tong

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