No surprises from the Fed

Currencies Direct September 22nd 2010 - 2 minute read

The Federal Reserve meeting yesterday evening did not throw up any surprises, but the Fed signalled a more sluggish outlook for the US economy and reiterated its willingness to take additional measures to boost the economy. There was no mention of concrete action as yet, which given the fact that we are rapidly approaching US mid-term elections, is sensible but the change in tone from “wait and see” to “we stand ready to act” was enough to reverse all of the Dollars recent gains in a broad sell off of the Greenback overnight. Over the next few days we will see if the market is correctly pricing another bout of QE in the near term or if this move will be shrugged off quickly since central bank threats of action has been spectacularly unsuccessful over the past few months. The Dollar sell off also brings the Japanese FX intervention back into focus, as the USD JPY pair moves back towards levels where intervention initially occurred. Prime Minister Kan has been quoted as saying the intervention in the FX markets in not yet over, so the fear is fast becoming a beggar-thy-neighbour competitive devaluation as central banks scramble to keep exchange rates low in the hope of stimulating the faltering economic recovery. The only problem is that not everyone can do it at the same time, and we can expect emerging markets and the commodity producing nations (since it will be these currencies that will strengthen as others devalue) to be none to happy about the prospect of significantly reduced competitiveness in world markets.

The Euro is benefiting from the USD weakness, although the Irish and Spanish bond auctions were broadly successful (the only issue was the high interest rate the market extracted for buying the Irish debt) it is Dollar weakness that is the main driver and we have moved past 1.33 in the EURUSD pair and under the 1.18 level in GBPEUR. This afternoon we get to see Eurozone consumer confidence, with another improvement forecast, but with a large amount of Eurozone data out on Thursday and Friday we can expect the Dollar to lead the way today.

Sterling is also benefiting from the Fed statement, dire public borrowing figures initially send the Pound lower in early trading yesterday and today’s publication of the Bank of England minutes (usually something that the market takes notice of) showing another 8-1 split in the voting has passed without much notice being taken. For the rest of the week we will probably see Sterling take a back seat until next weeks GDP figures but we should bear in mind the poor data flow in the UK means the pressure on Sterling is on the Down rather than upside.

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