QE3 Tapering Begins in US

Finally, the Fed has set the QE3 tapering programme rolling on the back of a stronger domestic economic recovery. The scaling down, though modest, will serve as a stepping stone towards ending the over-dependence on ultra loose policy measures adopted by central banks around the world to stimulate their respective economies. In the UK, it remains to be seen if the recent spike in consumer spending can last beyond the holiday season, especially in the wake of the BoE preferring to wait and watch for sustained growth signals before hiking interest rates. Meanwhile, EU finance ministers have struck a breakthrough agreement on the creation of a single resolution mechanism designed to close down ailing Euro zone banks.

Pound Sterling – UK Markets

The just released weaker than expected domestic annual retail sales report has attracted a relatively muted response from Sterling investors this morning. The retail sales print, though marginally below par, compliments reports of upbeat Black Friday sales towards the end of November and signals a renewed consumer spending trend heading into the New Year. Along similar lines, the CBI retail sector report has shown a further pickup in sales in December, amid deep discounts offered by various stores during the holiday shopping season. The buoyancy in retail sales is likely to be reflected in today’s overnight consumer confidence report and may further lift Sterling in the coming sessions. Meanwhile, Sterling traded on a stronger footing against the majors yesterday after the surprisingly upbeat labour market report showed that the UK unemployment rate dropped to 7.4%, the lowest level in four years, steadily heading towards the 7% target set by Mark Carney. Additionally, the latest BoE meeting minutes revealed policymakers’ concerns about the appreciating pound hampering the nation’s economic recovery and adding to disinflationary pressures.

US Dollar – US Markets

In his final act as the Fed Chairman, Ben Bernanke made the long awaited decision to begin tapering the QE3 programme, albeit at a modest pace, reducing asset purchases by $10 billion to $75 billion a month, citing recent improvement in the domestic labour market. The outgoing Fed chief also opined that the central bank may further reduce asset purchases at subsequent meetings if the economy continues to improve, emphasising that the US economy “has much farther to travel”. However, in a move that will cheer markets, the Fed indicated that interest rates will remain at the present low level for a longer period than previously estimated. Additionally, the Fed has upgraded its growth projections for the US economy for the next two years while also raising the nation’s employment outlook over the same period. Subsequently, the greenback strengthened against the majors yesterday with the trend carrying over to today’s trading session. Meanwhile, adding to the upbeat economic environment, the US Senate has cleared the two-year budget deal and paving the way for approval by Barack Obama. Today, the Philadelphia Fed index numbers and jobless claims data will be on investors’ radar.

Euro – European Markets

In the aftermath of the US Fed opting to trim its monthly asset purchases, the common currency’s winning streak against the US Dollar halted yesterday, with the Euro slipping below the 1.37 mark against the greenback. However, the doveish tone adopted by the US central bank limited the Euro’s losses yesterday. On the domestic front, following on the heels of an upbeat ZEW sentiment survey, yesterday’s German Ifo business climate report showed that business optimism in the Euro zone’s largest economy rose to a twenty-month high for December, although sentiment surrounding current business conditions remains subdued. Moreover, after months of negotiations, EU finance ministers have finally agreed to a deal that will allow the setting up of a central body to scale down failing banks before they damage the wider economy, thereby ending an era of massive bailouts. Meanwhile, the Euro has recovered from yesterday’s lows, but continues to trade on a weaker footing against the greenback in today’s trading session. With little on the domestic economic front to trigger risk appetite, the Euro-US Dollar pair will take direction from a slew of US macro releases today.

Other Currencies – Highlights

The Swiss Franc has continued to trade on a weaker footing against the US Dollar this morning, despite the Swiss government raising the nation’s growth forecasts for the current year while upholding its projections for 2014, citing upbeat domestic consumer spending and expectations of a pickup in global economic recovery. The upgraded forecasts are largely in sync with recent macro data that has indicated a pickup in the nation’s economic recovery. Meanwhile, data released earlier today showed that Switzerland’s trade surplus narrowed unexpectedly for November, with imports outpacing exports for the month. The Swiss Franc had moved lower against the US Dollar yesterday after the US Fed decided to scale down its monthly asset purchases beginning next month. With little on the domestic macro front, news flows emanating from both sides of the Atlantic will prove crucial for the Swiss Franc against the majors in the session ahead. Meanwhile, the Franc may gain some traction in the coming weeks, as Swiss banks may repatriate funds before the year-end.