FED commence tapering

Finally after all the uncertainty the US Federal Reserve (FOMC)
reduced their pace of asset purchases from $85bn to $75bn and this
is likely to be digested through the
FX markets today.  The essence for the markets was the
accompanying statement which was dovish and we saw an added
adjustment to their forward guidance, stating they shall keep
interest rates at the record low and below their 6.5 per cent
unemployment threshold.  The core message therefore that
tapering is not tightening, more just the logical step in line with
growth and employment improvements; a delicate balancing act. 
The markets have reacted rather tamely with the USD remaining at
very similar levels which suggests that the FOMC has managed to
convince the markets so far that this is not a hawkish move or a
small taper was priced in.

The key aims for the FED are to maintain stability and limit the
shocks delivered to the market via reduction of the asset purchase
scheme. Understandably, it would be counterproductive to develop a
stop start approach so a gradual but consistent reduction to the
balance sheet will likely be the schedule with the plan to complete
tapering by the end of 2014.  This of course assumes no fresh
shocks to the US economy.  

Yesterday, UK employment data showed an improvement last month
with almost 100,000 jobs created, meaning the unemployment rate
fell to 7.4 per cent and closer to the BOE’s 7 per cent target and
forward guidance. Hence, the probability of a UK rate rise has
increased and this broadly strengthened the pound through
yesterday’s trading.  Today UK retail sales are expected to
show a slight increase for November and later today we have US
jobless claims, existing home sales and the Philadelphia Fed survey
to look forward to.

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