Fed to Twist Again?

With the Fed’s two day meeting set to conclude today, policymakers in the US are widely expected to revamp the expiring “Operation Twist” programme. The proposed plan doing the rounds will see the Fed pump a fresh $45 billion per month through asset purchases to support the nation’s economy. However, with the unemployment rate falling and inflation showing signs of a pick up, it remains to be seen how long the Fed sticks to the balance sheet expanding exercise. In the UK, data just out has revealed that the number of seekers for jobless aid dropped unexpectedly for November, offering support to Sterling. Meanwhile, encouraging economic data from Europe and robust Spanish bond auctions offered a boost to high yield currencies yesterday.

Pound Sterling – UK Markets

Buoyant German and Eurozone economic sentiment data and encouraging Spanish bond auctions led Sterling to lose ground against the Euro in yesterday’s session. The Pound has continued to hover close to yesterday’s lows against the Euro this morning. Data just out revealed that claims for unemployment benefits in Britain unexpectedly declined for November. Meanwhile, the Pound is trading close to yesterday’s highs against the greenback ahead of the conclusion of the Fed’s two day monetary policy meeting later today, wherein the Fed is widely expected to announce a fresh round of bond buying. Meanwhile, with the chances of Britain losing its top notch credit rating remaining elevated following the Chancellor’s Autumn statement, the Chairman of the OBR, Robert Chote, pacified concerns by arguing that major western economies that had been downgraded suffered little harm. With no major domestic macro data scheduled for release during the week, traders will keep an eye on cues from the US and the Eurozone to seek further direction for the Pound.

US Dollar – US Markets

Risk appetite in yesterday’s trading session was bolstered after data revealed a recovery in German and Eurozone economic sentiment for December and borrowing costs dropped at a Spanish bond auction. With the Fed widely expected to embark upon an additional round of stimulus at the conclusion of today’s monetary policy meeting, the upside for the US Dollar against the majors looks limited in today’s trading session. Reports indicate that policymakers will replace the current “Operation Twist” programme with a fresh $45 billion per month purchase of assets in order to keep the monthly pace of total asset purchases at $85 billion. Meanwhile, with the deadline for the expiry of fiscal stimulus fast approaching, US President Barack Obama and the US House of Representatives Speaker, John Boehner, exchanged new sets of proposals to bridge their differences. It will be interesting to see whether these new proposals will help in breaking the ice among policymakers. Apart from the Fed’s monetary policy stance, traders will keep an eye on the central bank’s updated projections on economic growth, unemployment and inflation for clarity regarding future economic prospects.

Euro – European Markets

The Euro advanced against its major counterparts and toppled the 1.30 mark against the US Dollar yesterday, after data showed that the German economic sentiment index nudged into positive territory for the first time in six months. To add to the positive sentiment, Spain successfully completed its short term bond auction, with the nation’s borrowing costs falling despite the brewing political crisis in Italy. Meanwhile, uncertainty over Greece fails to abate. Despite the debt buyback programme attracting bids worth more than the target, the nation paid higher prices for buying the bonds. This could results in Greece’s debt levels staying above the IMF’s prescribed targets and has prompted Eurozone policymakers to meet tomorrow to decide on a further course of action. In today’s session, traders will keep a watch on Eurozone industrial production figures for October for some insights on the manufacturing front. However, the outcome of the Fed’s monetary policy meeting later today will likely be the major trendsetter for currency markets.

Other Currencies – Highlights

The Japanese Yen has declined against high yield currencies this morning as risk sentiment among traders improved, after reports indicated that the Fed would inject a fresh round of bond buying as the “Operation Twist” programme is set to expire at the end of this year. Moreover, fears over the Eurozone’s economic prospects took a backseat, after data showed a sharp improvement in German economic sentiment for October, while Spain successfully completed its short term bond auction in yesterday’s session. Meanwhile, data released earlier today offered some respite to Japanese policymakers, as machine orders and tertiary industry activity data came in better than expected for October. With no major domestic data due for today, traders will be keeping track of the Fed’s monetary policy meeting, given its influence on market risk appetite. Additionally, investors remain focused on this week’s general election in Japan, where the outcome has the potential to decide the future course of monetary policy in the country.