Currency Markets Brace Themselves For US Quantitative Easing Decision

Today sees the eagerly anticipated meeting of the US Federal Reserve Monetary Policy Committee that will set US interest rates going forward and decide if further quantitative easing (QE) measures are needed to stimulate the economy. Currency markets have been building up to this decision for two months. The general performance of the US economy has been lacklustre with US GDP figures on Friday coming in below expectations, unemployment still high and consumer confidence and spending low. A new round of QE would inject capital into the economy and could accelerate growth, but it is likely to send the Dollar lower against the other major currencies altering the state of play in the currency markets.

Pound Sterling – UK Markets

Yesterday’s close saw £1 buying €1.1430, a fall of 0.9% on the day as Sterling’s rally against the Euro began to ahead of key British and European decisions on interest rates tomorrow. Yesterday’s poor PMI construction data continued to blight the Pound’s performance however PMI services data this morning has come conversely above forecasts and the Pound has shown a rally against the Euro and US Dollar so far this morning since this data release. There had been some previous speculation over whether the Bank of England would also be looking at stimulus measures this month, but last week’s strong quarterly GDP figures have made this very unlikely tomorrow. There is a wide expectation that interest rates will be kept on hold, no additional stimulus and the same split in the voting as last month revealed in the Bank of England minutes in two weeks time.

US Dollar – US Markets

Fears that the Democrats would lose both houses in mid-term elections were unfounded. The Democrats lost control of the House of Representatives but held onto the Senate. The results will make it harder for the President and a degree of bipartisanship will be needed to get new economic measures into law. The Dollar had an erratic day against Sterling and £1 currently buys $1.6008 (at 07:10GMT). US data out today includes factory orders, ADP employment change and mortgage applications data however by far the key focus will be the Federal Reserve decision on stimulus decision due early evening UK time to set currency trends.

Euro – European Markets

The Euro closed 0.7% higher against the Dollar yesterday at $1.4018. Currently, the Euro is trading at $1.4015(at 08:10 GMT) having remained above the $1.40 barrier for most of yesterday’s session. The Euro was helped by Australia’s surprise interest rate rise which encouraged investment in riskier currencies. As we noted yesterday, the European Central Bank is to set interest rates tomorrow, but they are expected to remain on hold at 1%. There is no talk of any Eurozone QE measures being needed with the sovereign debt crisis not currently as in as much focus.

Other Currencies – Highlights

Unemployment figures for the third quarter are due out for New Zealand today and are predicted to show a slight improvement from 6.8 to 6.7%. The New Zealand Dollar is trading at £0.48193 and has been appreciating since mid August when it was at £0.45029 Following Australia’s surprise interest rate rise, the Australian Dollar hit its highest levels against the US Dollar since 1982.