FOMC members keep up dovish tone

Comments from New York Fed president William Dudley overnight
meant a continued dovish tone from the FOMC, and kept the US dollar
range bound against the pound and the Euro. Mr Dudley reaffirmed
the view espoused in the announcement last Wednesday: that the Fed
feels there is insufficient evidence that labour markets are
improving sufficiently, and dispute the lack of forward momentum in
the US economy. Due to a lack of US data for the rest of this week,
the market will be focused on upcoming speeches by other Fed
members who will be dropping hints on Fed policy moving
forward.

Interestingly, yesterday marked the trial run of the Fed’s
reverse repo operations announced in last month’s minutes, aimed at
alleviating the pressure built up in repo rates because of the huge
amount of safe assets the US central bank is mopping up as part of
its QE program. Chairman Bernanke’s aim when he announced the Fed’s
intention to taper earlier this year could have been to try to
alleviate the increasing strains due to the relative scarcity of
safe assets. The market misinterpreted the announcement in a big
way, so the Fed had to back-track. Seen in this light, could the
reverse repo trial actually be the Fed building up to tapering by
stealth?

The data highlight today is the German IFO business climate,
which is expected to show a marginal improvement from last month.
Now the German election has passed without major incident, the Euro
does look likely to benefit from positive data again – something
that was not happening before the election, as the outcome of such
a key risk event dominated trading. Later today, US consumer
confidence data is due, which is expected to show a marginal fall
from last month in-line with the Fed’s view that forward momentum
is slowing.