Fed tapers as expected, dollar strengthens.

Tom Tong30/Jan/2014Currency Updates

USD

The major news of course was the widely anticipated interest rate and tapering decision from the Fed. In the end, the taper was as expected – another $10 billion less of asset purchases, down to $65 billion a month. The committee obviously decided that recent poor jobs data and the continuing emerging market turmoil was not reason enough to slow the taper rate, voting unanimously to keep the programme on the path set out last month.

The dollar had already gained over the course of the day and actually, much like the effect we saw yesterday on the pound with UK GDP, the greenback fell back slightly in the moments after the announcement. By this morning it had steadied, finishing up 0.5% on the pound and half a cent on the Euro.

At this rate of taper QE will be finished by December, and barring major economic news elsewhere the dollar is likely to strengthen over the course, as supply of the currency artificially inflated by the Fed’s asset purchase programme decreases.

Today sees another key bunch of data released, including GDP, jobless claims and alternative measures of inflation. We should also expect some movement from all dollar pairs as European markets get a proper chance to react to the Fed announcement.

GBP

The pound had a quiet first session yesterday, as markets awaited the Fed decision later in the evening. It dropped off against the greenback at the open as markets bought ahead in preparation for the decision, before stabilising overnight. Early morning trading saw the pound fall again.

Sterling saw a slight spike against the Euro, poking its head above the parapet at highs seen last week, before losing grip and actually ending the day very marginally down. Volatility again was the theme, with swings in excess of 0.5%. GBP/EUR trading was lighter yesterday as investors’ attention was mainly on dollar pairs.

In his Edinburgh speech yesterday Mark Carney stayed away from discussing interest rates and instead focused on the concept of currency union between Scotland and the rest of the UK, were they to leave the union in September. While being very careful not to appear for or against Scottish independence, the Governor warned that Scotland would have to cede some fiscal and monetary unity to the UK if they wanted to keep the currency. The markets took it well, sending the pound upwards against the Euro and halting its slide off the Dollar.

Only data out of note today will be mortgage approval rates.

EUR

Not a lot of data from the EU yesterday, aside from disappointing Italian business confidence of 97.7 and Spanish retails sales, which fell 1% yoy in December. Similarly to the UK it was a quiet first session, bouncing back from early falls against both the dollar and Sterling, before the tapering announcement gave it some traction against the dollar.

It has been a relatively quiet few weeks for the Eurozone, as a lack of major data releases, coupled with more interesting activity elsewhere, has allowed the Euro to trundle along slightly under the radar. In reality, no bad news is actually good news for the continent tentatively testing the waters for signs of life.

Today sees a range of economic confidence figures for the EU as a whole, as well as German unemployment and inflation figures.

RoW

The sell off of emerging market currencies continued yesterday despite efforts by central banks to halt the decline, with South Africa the latest country to hike interest rates yesterday afternoon. The Rand, Turkish Lira and Russian Ruble were the highest profile victims of the sell off, all dropping off against the dollar for the third day this week. With Fed tapering set at the expected rate the trend is likely to continue.

There are winners from EM turmoil outside of the major 3 currencies, with the Japanese yen enjoying an excellent session as investors crave stability. It skyrocketed nearly 3.3% against the pound before falling back slightly ending 2.5% up for the day. It also managed to finish the Asian trading session 0.2% up on the dollar, in spite of greenback strength elsewhere.

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Written by Tom Tong

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