US Launches QE3

The Fed followed in the ECB’s footsteps by unveiling a fresh round of “open ended” stimulus, propelling high yield currencies to topple crucial levels. The Fed plans to spend $40 billion, on a monthly basis, to buy mortgage bonds for as long as it sees an improvement in the domestic labour market. With major central bank chiefs putting their money where their mouth is, the onus has now shifted toward policymakers to capitalise on the ground work laid out by central bankers. Against this backdrop, today’s Eurozone finance ministers meeting should be closely eyed to learn if Spain has been convinced to make a formal application for a bailout.

Pound Sterling – UK Markets

The Pound has continued to show resilience against the US Dollar and tipped the 1.62 mark in today’s session, as traders shunned safe haven currencies after the US Fed embraced a fresh round of stimulus. Additionally, the OECD provided some relief after it stated that there are 'tentative signs' that Britain will return to growth, in sync with the recent pick-up in Britain’s economic activity. However, Sterling failed to replicate the same performance against the Euro on account of easing global growth worries and amid growing optimism that Eurozone policymakers would initiate essential steps to alleviate Spain’s fiscal problems in today’s finance ministers meeting. With no major economic releases in today’s trading session, the Pound is expected to track the development of today’s Eurozone finance ministers meeting. Additionally, an array of key economic releases due next week, which includes the BoE’s minutes, CPI and retail sales data, will hold relevance in deciding the direction of the Pound against the majors.

US Dollar – US Markets

The Fed’s announcement of a fresh dose of QE has continued to put pressure on the US Dollar against the majors this morning. The central bank lived up to market expectations by unveiling its new bond buying programme to counter economic shocks, wherein it plans to buy $40 billion of mortgage-backed securities per month until there is a substantial improvement in the job market. Taking a leaf out of the ECB’s books, the Fed offered no specific timeline for the completion of the entire process. Along expected lines, the Fed forecasts interest rates to stay near zero until at least mid-2015. With the Fed doing its bit, attention is set to shift towards measures that policymakers will undertake in order to mitigate threats from the “fiscal cliff”. Key sets of macro releases due today are expected to reveal the current state of the US economy, but might have a limited impact on currency markets following yesterday’s announcement by the Fed. Despite rising oil prices, today’s CPI data is expected to confirm that inflation poses no major threat to the economy. Retail sales and consumer sentiment index will be eyed to gauge the health of the retail sector.

Euro – European Markets

Following the Fed’s acceptance to provide the long awaited third round of liquidity injection, the Euro has rallied against its peers and has convincingly moved above the 1.30 mark against the US Dollar in today’s session. With the recent accommodative policy stance by the ECB and the Fed, traders are expected to turn their attention towards crucial developments in the Eurozone in order to gauge the timing of measures to fight the debt crisis. Today’s Eurozone finance ministers meeting is expected to provide clarity over the prospects of a Spanish bailout. Ministers are also expected to discuss Ireland's plea to ease the burden on its public finances. Today’s meeting may hold the key in determining if the Euro stays above the 1.30 levels against the greenback. Meanwhile, the German economic sentiment survey, scheduled to be released next week, holds significance and would provide insights into the impact of the recent path breaking measures undertaken by the central banks.

Other Currencies – Highlights

The Japanese Yen has retreated against its major peers this morning on broad weakness in low yield currencies following the US Fed’s accommodative policy stance and after the BoJ Governor, Masaaki Shirakawa, warned of global headwinds to the country's economic recovery. Moreover, the Japanese Finance Minister, Jun Azumi, reiterated his earlier warning that Japan would intervene in currency markets in order to weaken the domestic currency, if required. This has turned market focus onto the BoJ’s monetary policy meeting scheduled next week for further clarity on the central bank’s stance. Additionally, yesterday’s announcement of fresh stimulus by the Fed has dampened the demand for safe haven currencies in today’s trading session. Meanwhile, on the macro front, data released earlier today confirmed that Japan’s industrial production continued to contract for July. Apart from the monetary policy decision, next week’s trade data should also be closely watched for more cues on Japan’s economic performance.