Markets primed on FOMC QE decision. Volatility heightened for G10 currencies.

Tom Tong18/Dec/2013Currency Updates

GBP

Dips across the board for sterling yesterday. London closed with the pound down against both the euro and dollar. Following inflation data dropping we saw a widespread sell off with traders electing to scalp short term gains and wait for a better opportunity to buy back into sterling. Inflation hit an unexpected 4-year low. Therefore this gives the BOE more room to keep interest rates low, ultimately meaning that sterling wont see the assumed rally from an interest rate change for some time.

CPI fell to 2.1% in November, the lowest since 2009. Thus, immediately sending the pound diving against the dollar and wider losses across the board. Fundamentally the BOE will not consider interest rate rises until unemployment falls to 7% under forward guidance. However, the easing pressure on the cost of living counters the threat of alarming inflation rises leading to a premature cut.

Presently investors will be sitting pretty waiting for the conclusion of the FOMC meeting. Most will be unwilling to move before the FOMC reveals their cards. The FED statement is due 19.30 GMT.

Plenty of data out of the UK today including – BOE minutes, MPC vote, claimant count change and average earnings figures.

EUR

The euro continued its recent onslaught against both GBP and USD. We saw strength being derived from figures confirming the first jobless fall in almost 3 years and a slight rise in inflation to 0.9%, slightly ahead of expectations. German ZEW came in at a staggering 62.0, much higher then the anticipated 55.0. Thus, giving clear signs that Germany is the stand out player in the eurozone whose economic situation is blossoming.

Moving away from the eurozone, the central banks of Sweden and Hungary have become the latest countries in the block to cut their interest rates and therefore keeping the risk of deflation away. Sweden cut its repurchase rate to 0.75% from 1% while Hungary lowered its rate to 3% from 3.2%

Although the short term data is very positive out of the eurozone, there are still worries that unemployment is far too high. Even states that are coming out of their bail out programmes such as Ireland are being monitored closely. There is a large feeling that market participants should take this with a pinch of salt as unemployment in Ireland is still at 12.5%, which is an incredibly high figure for a population of only 4.5mln. Bond yields for Ireland are also looked at as over valued with 10Y yields at 3.65%. In comparison to the US who has had a much stronger recovery but only yielding 2.85% on their bonds.

German IFO figures are to be released later this morning, but no other releases of note for today.

USD

Dollar closes down across the board as investors get jumpy over the curtain raising on FOMC decision on QE this evening – due for release 19.30 GMT.

Judgement day, all eyes on the FED, the street widely primed for no change in QE. However, also plenty of whispers that we could have a surprising sideshow about to unfold. It’s not as if the FED haven’t misbehaved in the past. Also a time for change with today being the last time Bernanke will address the market in his capacity as FED chair. Yellen will henceforth pick up the mantle.

The battle lines between FOMC members are clear enough, and we can be reasonably confident who will be the key voices for and against immediate tapering. But we can’t know how the relatively silent fence-sitters will jump, so it’s just not possible to know with confidence what the outcome of the meeting will be. However, our view remains – tapering will be deferred until next year, and that the unemployment rate thresholds—7% to stop QE and 6.5% to start raising rates — will be reduced by at least half a percentage point.

The key argument in favor of early tapering is that the cumulative improvement in labor market conditions over the past year has been enough to signal that the economy no longer needs the Fed’s extraordinarily bullish stance on QE. The opposing stance is that the improvement in the unemployment rate—the doves’ favorite indicator—is not mirrored in the employment rate. The FED therefore needs to offer as much support as possible until growth is strong enough to start pulling people back into the labour force, slowing the decline in unemployment to the extent that the act of tapering itself could not act as such a shock to the market.

All will be revealed 19.30 as the worlds cameras swing to Capitol Hill.

Other data out of the U.S today includes – economic projections and building permits.

Print

Written by Tom Tong

Vestibulum id ligula porta felis euismod semper. Donec ullamcorper nulla non metus auctor fringilla. Cras justo odio, dapibus ac facilisis in, egestas eget quam. Morbi leo risus, porta ac consectetur ac, vestibulum at eros. Donec ullamcorper nulla non metus auctor fringilla.