GBP/EUR 1.1986 (0.8342)
We warned yesterday that with a market heavily positioned for a dovish FOMC, risks were to the upside for USD, and we were not disappointed. The FOMC minutes gave us little new on reflection, ignoring comments from Fed speakers either supporting or against tapering, the Feds rhetoric has been consistent. Tapering will happen, it cannot go on for ever and the Fed have continuously said that should conditions warrant they will begin to ease back on their current QE program. It is really a question of timing how you position for the inevitable USD strength that will come with it.
The minutes from the Fed suggested they have begun to lay the groundwork to start tapering and this may happen in the coming months providing data continues to support growth. The Fed saw the US economy expanding at a moderate pace with continued improvements in the labour market. They did voice concerns that current policy is restrictive to growth but highlighted persistent, unusually low consumer sentiment. Lowering the unemployment threshold was also discussed but this may well be a target that is moved later next year.
The minutes did not set out a fixed time for tapering to begin, a Bloomberg survey saw only 5% of respondents reply with expectations for tapering in December. Fed member Bullard highlighted that November employment data will be key to any tapering decision – as we have been saying for a while now, it is time to put less focus on Fed members wording and pay attention to what the data is telling us. Overall the USD has been stronger across the board, although we would have expected to see a little more strength, perhaps the ambiguity keeping some USD bulls on the sidelines for now.
The impact US QE has on global markets is evident, following the FOMC release, equity markets sold off heavily, this continued into the Asian session overnight as the removal of cheap money and the potential for higher rates knocked investor confidence. Asian markets were also impacted by weak Chinese PMI data. The Nikkei however broke the trend, rising in line with USD/JPY as the BOJ left policy unchanged with the economy also recovering moderately.
The BOE minutes threw up little surprises, voting remained 9-0 to maintain rates at all time lows and to maintain asset purchases at £375 bln. As we mentioned the minutes lagged the inflation report released last week and as such offered little new in terms of GBP outlook. That being said the pound continues to look firm, GBPUSD continues to gravitate towards 1.6100 and even despite last nights FOMC minutes looks like one of the stronger performers against the USD. EURGBP also dropped close to 10 months lows, .8300 is very firm technical support and will likely be tested again.
The Euro faced selling pressures of its own yesterday when it emerged that the ECB may well be looking to reduce the deposit rate to -0.1%. The cut to the benchmark rate at the beginning of the month did little to impact EUR strength with much of the lost ground retraced over the following weeks. A cut to the deposit rate is unlikely to see people charged for holding EUR deposits but it will encourage banks to use their cash if the ECB is to charge them for holding it. This is only talk for now but should we see a follow through, the single currency will be facing further selling pressures. ECB president Draghi speaks later and may allude further to this.
The Euro has already had a see-saw morning, French manufacturing and services PMI data was weaker than expected, falling below the benchmark 50 contraction/expansion level. The EUR sold aggressively until the same German data was released, only this time the core was stronger than expected, helping the EUR to cover all its French losses. Eurozone composite PMI figures are due at 9am and may put the Euro under further pressure ahead of consumer confidence later in the day.