Market News & Insights
29 January 2014

Yellen Goodbye to Bernanke

EUR/USD 1.3682
GBP/USD 1.6593
GBP/EUR 1.2127 (0.8245)
EUR/CHF 1.2270
GBP/CHF 1.4880
GBP/AUD 1.8944

The amount of positivity priced into GBP was evident on yesterday’s UK GDP release. The figure came in as expected, posting Q4 growth of .8% bringing 2014 GDP to 2.8%, the best year over year growth level in 6 years. The immediate reaction was for markets to start selling GBP, which dropped almost 70 pips against USD and some 20 pips against EUR. These were very good growth figures for an economy that less than a year ago was looking at going into a triple dip recession but it is becoming increasingly more difficult to live up to current interest rate hike expectations and when a currency faces selling pressure on such strong data we tend to be concerned.

This level of growth certainly should be deemed as positive but is it strong enough to warrant rate hike expectations in the coming months? We think this is very unlikely and do not see the BOE raising rates until 2015. We would expect some change in the BOE’s forward guidance criteria and feel this is likely to be negative for GBP over the coming months. The pound still has positivity behind it and this may well remain until the BOE inflation report next month.

The FOMC started their two day policy meeting yesterday which is due to conclude this evening and those looking for tapering to continue would not have been supported by yesterday’s weak data from the US. US Durable goods orders declined 4.3% versus an expected increase of 1.8%. The Case Schiller composite was also worse than expected with only consumer confidence showing positivity posting 80.7 vs 78.0 expected.

The big question is whether the US has come far enough for a steady stream of tapering. December’s decision to taper caught the markets off guard, but the USD has failed to follow through on material gains, we believe the market needs to be convinced the Fed will be taking a steady route to tapering and that is why this month’s meeting is vital to USD. Either way we see a breakout in USD, if tapering continues by another $10 bln, reducing asset purchases to $65 bln per month then we expect to USD to make bullish moves. Failure to continue the taper will open the Fed to criticism and the USD to heavy selling.

The alternative would be a token taper, perhaps $5bln. This may well appease both camps but in our eyes would still see USD selling. This is Bernanke’s final meeting as he hands the reigns to Janet Yellen and we will be watching the policy statement closely for any indication in changes on the unemployment threshold. Much of Yellen’s academia supports lower unemployment targets to support growth and we would not be surprised for her to bring this stance through to her new position.

Aside from this evenings FOMC, the calendar is light so we would expect major FX pairs to remain very much in consolidation ahead of this evening release.