Currency Brief: Rampant caution ahead of FOMC decision

on Dec 18, 2013
Updated: Oct 21, 2019
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Uncertainty pervades the markets today as to whether the Fed will “pull the taper trigger” at the conclusion of the two-day meeting of its policy-setting body, the Federal Open Market Committee.

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Global equities are in retreat from yesterday’s gains while US Treasury bonds have edged higher and the dollar is broadly flat.
The FOMC will announce today whether it will begin scaling back its $85 billion-a-month quantitative easing programme, in place for a year now.
Grant Lewis at Daiwa Capital Markets offers this take: “Last week’s U.S. fiscal policy agreement, as well as some encouraging data – including recent circa 200,000 gains in non-farm payrolls and the drop in the unemployment rate to 7 per cent – have significantly raised the probability that the FOMC will agree on Wednesday to start tapering its asset purchases.”

Other analysts note though that the yield on the 10-year Treasury is now close to where it stood in September just before the Fed surprised the markets by failing then to initiate the taper process. And it’s the persistence of a low inflation rate, which in September as now, stands far below the Fed’s two per cent inflation target which may well see the Fed refraining from acting just yet.

Michael Hanson, chief US economist at Bank of America – Merrill Lynch, puts the BoA stance like this: “We look for a gradual taper process starting in the first quarter next year and for the Fed to signal that the first rate hike will not occur before the first quarter of 2016, conditional on data.”
On the euro-front, the single European currency is now looking resilient, reflecting a return to relative stability in the Eurozone’s periphery, and even immune to fallout from a taper across the Atlantic.

The euro’s strength is also a function of aggressive policies pursued by other major central banks: US stimulus aside, the Bank of Japan’s unprecedented measures have seen the euro at a five-year high against the yen. Additional upward pressure on the euro has come from the surge in early repayments by
European banks to the ECB of the cheap long-term loans taken out during the Eurozone crisis.

In Germany the December IFO survey is out today (at 09:00 UTC) and in the UK, the Bank of England will publish its latest minutes and the MPC voting (at 09:30 UTC), plus Claimant Count Change for October and the ILO Unemployment rate for the quarter through October.
US data comes later, including November Housing Starts and Building Permits (13:30 UTC). The FOMC rate decision is due at 19:00 UTC.
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