GBP/EUR 1.1919 (0.8390)
The USD has started the day lower as it enters a key trading day. This evening is the conclusion of the two day Fed meet, where policy is to be discussed and the market is expecting the outcome to set the stall out for the USD going forward. Today’s Fed release has been one of the most talked about events in months with initial expectations leaning towards the Fed reigning in their stimulus program.
Recent data from the US however has been less supportive, the unemployment rate fell but this was more to do with people leaving the workforce all together, data has been trending lower than expectations with confidence surveys pointing to recovery, but a gradual one. There is no surprise here for us really, no one expected the US recovery to be explosive, but conditions have improved significantly since QE3 began, and as such it is time to begin to remove the stimulus, we feel there will be a cut in bond purchases by $10-15 bln.
There are however three possible outcomes in our view. 1. No Taper – the Fed opt to leave tapering on hold for now. This will be negative for the USD. 2. The Fed taper – this will likely see the USD rally somewhat as a survey yesterday suggested some 20% of respondents do not believe there will be any taper. 3. No taper and a change to forward guidance policy – This will be USD negative as it would likely involve pushing back rate increases even further, with further accommodation.
UK releases today bring us the minutes from the BOE’s September meeting. The pound has gone from strength to strength since Carney has taken office, despite the BOE promising to keep rate at current low levels until 2016/17, the simple fact is that markets to do believe the BOE rhetoric and real interest rates have been rising as the price of benchmark gilts falls. The BOE’s caveats to exit low interest rate and accommodative policy remain the same, an unemployment rate of 7% and they may have to step in if inflation remains stubbornly high.
Concerns about the latter appear to be easing as yesterday reading for UK CPI inflation dropped from 2.8% to 2.7% as inflationary pressures cooled in the UK. This had little impact on GBP yesterday however and unless we see some material change in voting, then the pound is likely to continue to rise. Last month’s meeting saw members vote 9-0 to maintain rates and asset purchases, however the recent rise in rates may force the BOE’s hand, it will be interesting to see if any members vote for further accommodation or asset purchases to ensure rates remain low and supportive of growth and recovery.
Euro-zone investor confidence surged to a four year high as the ZEW survey smashed expectations posting 58.6 versus 44 the previous month. The EUR paid very little attention to this news and remained very much in consolidation throughout the day with markets anxious ahead of today’s FOMC decision.