Fed more hawkish than expected

Currencies Direct November 21st 2013 - 2 minute read

Last night the minutes from the US Fed (FOMC) were more hawkish
than expected with the Fed showing a desire to start scaling back
on their QE programme sooner than expected. Any scaling back will
still be data-dependant but given the latest positive non-farm
payroll data and yesterday’s robust US retail sales, a taper is now
back on the table in the coming months.  In addition the FOMC
revealed little support for lowering the unemployment threshold for
the first interest rate hike from 6.5 per cent.  The USD
gained following the minutes against the pound and the euro.

The euro yesterday weakened sharply against the USD and the
pound even before the release of the FOMC minutes.  The euro
fell on the talk that the ECB is considering negative deposit rates
and the FOMC minutes reinforced this downward momentum.  The
move would lead to financial institutions in mainland Europe
getting charged for holding their funds with the ECB
overnight.  The hope would be that banks and other financial
institutions would then be encouraged to lend rather than deposit
their funds with the ECB. 

We also had the Bank of England minutes yesterday which
confirmed that all members voted to keep rates on hold at 0.5 per
cent and for no further change to the QE programme.  The BoE
reinforced their view that interest rates will remain on hold until
unemployment falls to at least 7 per cent and even at this juncture
a hike is not guaranteed – they could simply move the goalposts
further. The minutes overall maintained a dovish stance, but the
pound gained especially against the euro following the negative
deposit rumours for Europe.

Elsewhere the AUD weakened further as RBA governor Glenn Stevens
said he would not rule out currency intervention in an attempt to
further talk down the AUD which the IMF noted is still 10 per cent
overvalued.  Weak data from China also helped to reinforce AUD
weakness.

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Currencies Direct

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