Will the Fed Implement Quantitative Easing?

With the Fed repeatedly voicing its commitment to support the ailing job market, traders expect the Fed to embrace further easing measures at its policy meeting today in order to spark a new lease of life in the US economy. However, any reluctance for a QE3 could risk the recent rally in high yield currencies. Yesterday, markets breathed a sigh of relief after the German constitutional court ratified the ESM, paving way for starting the ECB’s bond buying programme. At home, the domestic labour market once again provided a huge upside surprise with improvement in the employment and claimant figures.

Pound Sterling – UK Markets

Sterling continued its climb against the US Dollar in yesterday’s trading session, as easing fears over the Eurozone debt crisis and hopes of further stimulus measures from the Fed prompted investors to shun the US Dollar. Moreover, signs of improvement in Britain’s economic landscape continued to act as a catalyst to Sterling’s resilience against the greenback. Following the upbeat PMIs and industrial production data, yesterday’s labour report revealed an unexpected drop in the number of people claiming unemployment benefits in the UK for August, validating the belief that the nation has begun its journey out of recession. The Pound has continued its upward momentum against the US Dollar in today’s session, as “risk on” sentiment remained buoyant ahead of the Fed’s monetary policy decision scheduled later today. Despite a steady flow of positive news from the UK, the Pound has remained under pressure against the Euro following yesterday’s German court verdict and prevalent hopes of a new dose of QE for the US economy. With a light domestic economic calendar, the outcome of the US monetary policy meeting is expected to drive market sentiment today.

US Dollar – US Markets

In the much awaited monetary policy meeting scheduled later today, a majority of market participants expect the Fed to embark upon further easing measures to revive the ailing US economy. The central bank is also anticipated to extend the duration of its zero interest rate regime further into 2015. The greenback has slipped against most of the major currencies this morning. Yesterday’s session saw the US Dollar continue to under perform against the Euro and Sterling, as German Lawmakers reaffirmed the nation’s contribution to the Eurozone’s rescue fund. On the macro front, wholesale sales grew more than expected for July while today’s jobless claims and producer price inflation data will deliver further cues on the economic front. However, these are likely to be overshadowed by the outcome of the Fed’s policy meeting. Following drastic changes in the ECB's stance last week, the baton seems to be have passed on to the Fed for taking some concrete measures in today’s monetary policy meeting. Any negative surprises on this front could prompt traders to take shelter in the US Dollar.

Euro – European Markets

In yesterday’s trading session, the Euro surpassed the 1.29 mark against the US Dollar after the German constitutional court approved the nation’s contribution to the ESM and validated the EU’s budget pact, thereby removing a key hurdle in bringing the region’s rescue fund into force. The Euro managed to cling on to yesterday’s gains against the US Dollar and Sterling this morning on hopes that the Fed would deliver a third round of stimulus later today. Moreover, news indicated that pro-European parties won a sweeping victory in Netherlands. Positive developments in Germany and the Netherlands have sparked hopes of a greater political union, especially after the European Commission President, Jose Manuel Barroso, laid out a path to further economic and fiscal integration among the countries in the region. Having witnessed its short term bond yields fall sharply in yesterday’s auction, Italy is expected to cross today’s long term bond auctions hurdle with ease. However, the Fed’s monetary policy decision will remain the key point of reckoning in today’s session.

Other Currencies – Highlights

The Swiss Franc is trading lower against the Euro after the Swiss National Bank (SNB) lowered its current year growth forecast to 1%, compared to its earlier projection of a 1.5% growth forecasted in June. On broadly expected lines, the central bank maintained the minimum exchange rate unchanged at CHF 1.20 per Euro and indicated that it would continue to enforce it with utmost determination. Meanwhile, the central bank left its benchmark interest rate unchanged at current levels. On the macro front, the SNB foresees no threat on the inflation front, a perception validated by data revealing a drop in annual producer and import prices for August. With no major domestic economic releases scheduled during the week, the Swiss Franc is expected track the risk sentiment following the Fed’s monetary policy meeting later today.