Currency Briefing: Forward guidance vs. QE tapering

on Sep 13, 2013
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The euro has been able to mount back into the area above the 1.3300 mark against the dollar with both doubts over the ECB`s forward guidance (which translates into the promise of continued low interest rates) as well as about the degree to which the Fed will start tapering its bond purchases, remaining the most important drivers of the current gradual uptrend.

Some observers might be of the opinion that the rise in risk appetite has also been providing support for euro strength. However, during the recent periods of increased risk aversion, it has become obvious that the euro has increasingly turned into a safe haven currency, competing with the greenback in this respect. As a result, the risk-on and risk-off oscillations are no longer the main catalyst of the exchange rate, as was the case during the peak stage of the euro zone sovereign debt crisis.

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Market attention is fully concentrated on the central banks on either side of the Atlantic. Against this backdrop, Eurostat said yesterday that industrial production across the region fell 1.5 per cent in July from June, the biggest fall since September 2012. The far steeper than anticipated drop in industrial production was perceived to be a disappointing start to 3Q, according to analysts. Chris Williamson, chief economist at Markit added that the data “call in question the region’s recovery that was signaled after GDP rose a stronger than expected 0.3 per cent in the 2Q 2013.” While the positive economic surprises continue, after the euro area industrial production reading, markets will probably remain more convinced about the ECB`s forward guidance.

On the other side of the Atlantic Ocean, a report showed jobless claims in the U.S. declined last week to the lowest level since April 2006.
On Friday there are a couple of events which could potentially affect the market. The Economic and Financial Affairs Council which meets in Vilnius for two days is one of the key formats of the Council of the European Union. The meeting is important as every six months Ministers of Finance, managers of the central banks of all EU member states, as well as representatives of key EU institutions meet at informal meetings during the ECOFIN and this time the key objective will include strengthening confidence in the efficiency of EU financial policy. Any positive echo from the meeting that ends on Saturday, in addition to the announcement of the ECB`s powers of oversight over all euro area banks starting in October 2014 after an EU vote, could push the euro bounce gradually north.

The rest of data for today will come from Geneva where the U.S. Secretary of State John Kerry meets his Russian counterpart in talks over Syria, from the U.S. retail sales release for August (13:30 BST) and Reuters/Michigan Consumer sentiment index for September (14:55 BST).
In July retail sales rose 0.2 per cent, pointing to acceleration in consumer spending. The data was applauded by investors expecting the Federal Reserve to draw down its economic stimulus program. The Fed currently buys $85 billion a month in long term bonds, a program known on Wall Street as QE. Many economists expect the Fed to announce its start of tapering next week. A better-than-anticipated data announcement today will probably convince the markets the Fed will follow through, though there is a chance that the start a scaling back of the stimulus program has not already been fully decided upon. That`s a question many analysts have been posing for more than a month.
U.S. consumer confidence retreated in August from the previous month’s six-year high due to increased mortgage rates that weakened consumer confidence. It`s crystal clear that speculation about Fed tapering will continue in both scenarios, i.e. a good or a bad reading of the index, at least until next week.

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