GBP/EUR 1.1981 (0.8344)
Janet Yellen signalled her intent in her first post FOMC press conference yesterday evening. The Fed opted to maintain the pace of tapering at $10 bln per month, reducing the Monthly MBS purchase to $25bln and treasury purchase to $30 bln. Despite speaking for over an hour in the press conference the markets focus was on three little words from Yellen, “within six months”, commenting on the time for interest rate increases from the end of tapering.
Needless to say this awoke USD bulls with the greenback rallying the most in over six months. The prospect of reduced QE and interest rates rising sooner than expected has hit global equity markets with US indices falling for the first time in three days, with Asian markets following suit, European indices have opened lower on the back of this and as the prospect of further sanctions on Russia sinks in. The Feds stance was not unexpected, if it had been the USD move would have been even more aggressive, but the interest rate outlook provides a change from the Fed, whether Yellen meant to be so specific or not remains to be seen. As it stands we would expected the QE to be wound down by October, with first rate increases coming towards the end of Q1 ’15.
GBP has been firmer over the last 24 hours, helped firstly by the better than expected jobs figures with jobless claims falling 34.6k versus 25k expected. The unemployment rate remained at 7.2%, above the BOE’s initial 7% target. The BOE minutes were also in focus in the morning session and although not carrying the same sway as the FOMC, it still provided us with some insight into BOE policy.
While the pound’s strength has been attributed to interest rate expectations moving far ahead of BOE guidance the minutes highlighted concerns on the recovery. The MPC noted that the recovery was not balanced and the pace of recovery has been curbed by a strong GBP curbing inflation. These are similar words voiced by the ECB and the BOE highlight ” Risks, of further pound gains as the economy recovers”. While the pound gains may be a given with recovery, the fact the BOE have highlighted it as a risk may indicate they might look to control it, should it hamper recovery.
Data from the Eurozone has been light and with that the EUR has managed to remain firm despite larger USD demand. As things stand in Europe, without negative headline risk or ECB action the single currency stands to gain as its balance sheet contracts and rates rise. A potential fallout from sanctions on Russia may be the only immediate danger facing the single currency as currently there is no G8. With sanctions already in place on Russian and Ukrainian officials, a third set of sanctions are currently being discussed, including economic measures.
On a side note the prospect of rising rates and thinning QE in the US may well see focus return to EM markets and currencies. This is an area we will be keeping a considerable eye on and risks develop.