Fed Does it Again

On expected lines, the Fed decided to replace the expiring Operation Twist programme with a plan to buy $45 billion of US government bonds per month from January 2013. In an unprecedented move, the Fed explicitly set unemployment and inflation thresholds for its monetary policy guidance. With the FOMC meeting out of stride, traders will now look forward to the nation’s lawmakers to reach an agreement on the fiscal cliff issue. In Europe, policymakers provided a boost for a closer integration of the Eurozone by agreeing to give the ECB powers to regulate the region’s major banks. Meanwhile, prospects for the UK ahead of Christmas appear bright, as the labour market yesterday showed strength.

Pound Sterling – UK Markets

After a long wait, the Eurozone finance ministers agreed on a deal to give the ECB powers to regulate the region’s banking system, leading the Pound to trade under pressure against the Euro this morning. Moreover, Sterling is trading marginally lower against the US Dollar, as most of the optimism surrounding the Fed’s decision to expand monetary stimulus appears to be already priced in high yield assets. Meanwhile, the UK job market continued on the path to recovery, as yesterday’s figures showed that claimants for unemployment benefits, which is broadly seen as a timely measure of labour market situation, unexpectedly declined for November. Positive signals from the labour market offers support to the belief that the UK is well poised to move along the path of recovery in 2013. However, MPC member, Spencer Dale, stated that Britain faces a “long and painful” road to recovery and argued that the incoming Governor, Mark Carney’s plan to abandon inflation targeting and switching focus on growth could jeopardise the central bank’s credibility. With the recent domestic manufacturing PMI showing signs of recovery, today’s CBI survey of industrial orders in the UK is keenly eyed.

US Dollar – US Markets

The US Dollar weakened against the majors yesterday after the Fed decided to commit to monthly purchases of $45 billion in treasuries along with the $40 billion per month in mortgage-backed bonds which started in September 2012. The central bank indicated that it would refrain from raising interest rates until the unemployment rate slips below the 6.5% or the projected rate of inflation in two years time exceeds 2.5%. Despite the Fed playing its part in strengthening the recovery, lawmakers in the US remained at loggerheads, as the US House of Representatives Speaker, John Boehner, indicated that "serious differences" remain with the US President on the fiscal cliff issue. The Fed Chairman also warned of serious consequences in the event the US does not find a solution in time. With the much awaited FOMC meeting coming to a close, all eyes will be on a flurry of economic data from the US later today which includes retail sales and producer price inflation figures for November.

Euro – European Markets

The Euro has remained resilient against the majors in today’s trading session after the EU leaders showed more resolve to tackle the region’s economic woes by agreeing to provide the ECB with new powers to regulate the region’s banks. The decision once again proves that the EU members can get their act together in difficult times. In yesterday’s session, the Euro nudged higher against the majors following the Fed’s decision to add further easing tools to its arsenal. Moreover, in the first hurdle since Prime Minister, Mario Monti, announced his intention to resign, Italy saw its one year yields fall to their lowest level in nine months at yesterday’s auction. Reports also indicated that the Eurozone finance ministers are set to back the release of another tranche of aid to Greece in today’s meeting. Meanwhile, all eyes will be on today’s bond auction in Spain for further insights into sentiment among market participants. Apart from a flurry of economic data from the US, traders are also expected to pay a passing attention to the ECB’s monthly report for clarity on the interest rate front.

Other Currencies – Highlights

The Swiss Franc advanced against the US Dollar and the Euro in today’s trading session after the Swiss National Bank, on expected lines, kept the minimum exchange rate of CHF 1.20 per euro unchanged and left its benchmark interest rate unaltered. However, the central bank reaffirmed that the Swiss Franc remains at elevated levels and it stands ready to undertake further measures, if warranted. Meanwhile, deflation in the Swiss economy appears to be a legitimate threat, as the Swiss National Bank, in its latest projections, expects consumer prices to fall 0.1% in 2013, compared to its previous estimate of a 0.2% increase. However, the recent data indicating a rise in Swiss producer & import prices and ZEW expectations index should provide some encouragement about the economy to the Swiss National Bank. With no major economic data due for the week, traders will keep an eye on developments in the US and Europe for further direction.