Foreign Exchange News
16 August 2013

Equities Suffer as Taper Edges Closer

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EUR/USD 1.3344
GBP/USD 1.5633
GBP/EUR 1.1712 (0.8538)
EUR/CHF 1.2356
GBP/CHF 1.4471
GBP/AUD 1.7024

US equity markets have come under severe selling pressure, breaking through key technical levels with the dow Jones down over 2% yesterday. The strength of US equity markets has been in question for much of the year, despite edging to fresh all times highs, however market participants have been questioning the validity of these record highs as, lets face it, the US or Global economy is still have nowhere near the levels of pre 2007/8.

Investors have been utilising the cheap money provided by Fed easing to leverage up, increasing their risk profile in the search of higher returns. The threat of removal of this stimulus has made investors cautious and as such as we approach D day for the Fed to scale back its QE program investors are taking their profits and closing off risk. We have to point out, as Bernanke has himself several times, that a taper is not an end to policy easing, simply reducing the pace of asset purchases, rates will remain low and accommodative until unemployment comes in line.

US data on the whole has been supportive of a September taper,and yesterday’s releases were no different. There has been a continued improvement in the labour market with the weekly jobless claims falling by 15k to 320k, this brings the 4 week average to a post-recession low of 332k. As we mentioned yesterday, core inflation appears to have bottomed out rising from 1.6% to 1.7%. It wasn’t all positive news as the Philly Fed survey and US manufacturing figures were weaker than expected resulting in a selloff in USD, which had advanced nicely throughout yesterday.

GBP is a long way from the doom and gloom of the start of the year. Facing a triple dip recession, increasing prospects of additional QE and a new incoming governor who was a vocal supporter of such policy the pound sold off heavily. The UK certainly appears to have turned to corner and there is little doubt that the outlook for the UK and the pound has improved materially, yet GBP has yet to retrace even half of the years losses. Forwards guidance would have us believe that rates will be low until late 2016 however the caveats provided may see these end sooner than expected.

The pound has strength in reserve and is likely to continue to show positive moves as the UK economy improves. It is also now benefiting from the taper effect in the US, receiving capital that has exited a nervous US market. There are certainly risks in the UK, employment has remained stubbornly high but any signs of improvements can only benefit the pound.

Today’s Eurozone calendar is relatively light, CPI data is due to remain at 1.1%, well below the ECB’s target. Should inflation remain low we may see further calls for easing from the ECB or further rates cuts as the economy certainly has the capacity to absorb without inflation concerns. Later in the US we have building permits and housing starts, which will be followed up later in the evening by the University of Michigan Confidence Survey.

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