Currency Briefing: Orderly exit

on Aug 20, 2013
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The greenback has been hurt in the past week in part by mixed data that have urged questions about the strength of the U.S. economy and whether the central bank will adopt a slowing pace to its monetary stimulus as early as next month. The Fed currently buys $85 billion in assets per month as part of its attempts to support economic growth.

In terms of data this week, the focus is expected to be Wednesday with the publication of minutes from the Federal Reserve`s policy meeting at the end of July. These may provide more evidence about the Fed`s stimulus plans, including how many policy makers are eager to slow asset purchases. Most top Fed officials who have spoken since the Fed`s last meeting have not ruled out a September tapering. St Louis Fed President James Bullard was the only one giving preference for the October or the December meetings. “The committee would not normally remove policy accommodation in an environment where inflation is below target and is projected to remain there,” said Mr. Bullard, reiterating that inflation was a real danger of the planned tapering.

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“I still have my doubts on the degree to which the Fed is going to be able to exit the stance of policy in an orderly way”, said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford. He pointed to the pretty “dramatic move in markets” on June 19 when Ben Bernanke outlined the conditions that would encourage the Fed to reduce and ultimately end asset purchases. Mr. Bernanke`s remarks pushed the yield on the benchmark 10-year treasury to a 22-month high and erased $3 trillion in value from global equity markets over five days. “Exit from unconventional monetary policy, when needed, may be difficult to manage and less smooth than desirable, possibly leading to sharp rises in bond yields and serious negative consequences for growth in a number of advanced and emerging economies,” said Pier Carlo Padoan, deputy secretary-general and chief economist at the OECD.

In the context of the U.S. economy put into gear now, with an economic growth standing at an annualized rate of 1.7 percent in the second quarter of 2013, Tuesday`s Chicago Fed National Activity Index, scheduled for 13:30BST, is the only data on the calendar to show more signs of improvement. In June, the index slightly rose to negative 0.13 from negative 0.29 in May. There is no other meaningful news to be released on Tuesday.

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