Fed Playing the Waiting Game

The Fed meeting yesterday failed to yield any surprises, as the FOMC decided to maintain the status quo on its asset purchases programme, citing the recent fiscal woes as being a deterrent to economic growth. With the Fed adopting a wait and watch approach before taking any decisive action, it remains to be seen whether the current Governor begins to unwind the stimulus before his term expires. Following weak CBI retail sales data, the unexpected decline in consumer confidence for October has confirmed fears of weakness in the UK retail sector for the current month. Meanwhile, key Euro zone macro releases today will be eyed for further insights into the progress of the currency bloc’s economic recovery.  

Pound Sterling – UK Markets

The Pound softened against the US Dollar yesterday after the US Federal Reserve adopted a slightly hawkish tone while maintaining the pace of its QE3 programme. The central bank’s stated that it sees an improvement in the US labour market and economic conditions. This weakened high yield currencies and boosted demand for the greenback. In a major flip, the GfK UK consumer confidence unexpectedly declined for October on growing concerns of a squeeze on household incomes following price increases by some of the major energy suppliers. The housing market in the UK continues to prosper as the Nationwide report released earlier today has revealed a further rise in the UK house prices for October, though it had little effect on the weakened Pound against the greenback this morning. However, the largely upbeat domestic economic data continues to offer encouraging signals of a sustained economic expansion at home. In this context, tomorrow’s manufacturing PMI numbers will be keenly eyed by investors. Later today, the US initial jobless claims data will be closely watched by Sterling investors for further direction, especially in the aftermath of the downbeat ADP employment numbers yesterday.

US Dollar – US Markets

As expected, the Fed refrained from altering its monetary policy at its meeting yesterday. The central bank indicated that although the economy is improving, they will continue to monitor the economic situation to assess whether it is appropriate to adjust the level of asset purchases, a more hawkish tone compared to its earlier stance. Subsequently, the greenback strengthened against its counterparts, despite reports earlier pointing towards a weakened labour market and softening inflation. A report by ADP showed a slower than expected hiring for October, whereas the inflation report confirmed that price pressures in the US remain benign, offering more room for the central bank to manoeuvre its monetary policy. The greenback has continued to build on yesterday’s upward momentum against its peers in today’s trading session ahead of the initial jobless claims report later today, which is expected to show a decrease in new filings for unemployment benefits in the US.  

Euro – European Markets

“Risk-on” sentiment took a beating yesterday causing the common currency to trade on a weaker footing against the US Dollar, even as the Fed decided to continue with its asset purchases and wait for more evidence of sustained progress, before adjusting the pace of its purchases. The marginal improvement in business sentiment in the Euro zone also failed to inspire confidence among investors, as the Euro slid further against the greenback, highlighting that the recent run-up in the Euro was largely due to reduced expectations for Fed tapering. Meanwhile, the single currency is trending lower against the majors this morning after data released earlier today showed an unexpected decline in German retail sales as well as consumer confidence complementing the slightly weak employment print yesterday. The weak German economic data lately is expected to weigh on the overall health of the Euro zone, despite upbeat news flows from the peripheral economies. Later today, the Euro zone consumer price inflation and labour market data will be closely scrutinised for further direction on the region’s future growth prospects.  

Other Currencies – Highlights

After sliding sharply against the US Dollar following the Fed’s statement on monetary policy yesterday, the Japanese Yen has made good most of yesterday’s losses this morning after the Bank of Japan reinforced that inflation will almost reach the central bank’s target of 2% by 2015, while continuing with its unprecedented monetary easing measures to support the economy. In the post-meeting statement, the central bank raised the nation’s economic growth forecast to 1.5% from the previously estimated 1.3% growth for the next fiscal. The central bank’s policies seem to be having a positive effect on the economy, as indicated by the upbeat industrial output and manufacturing PMI reports early this week. Meanwhile, Etsuro Honda, one of Prime Minister Shinzo Abe’s top economic aides, has opined that the nation should lower its effective corporate tax rate to the global standard of advanced economies in order to bolster growth. With no major domestic economic releases on tap, the Yen will take direction from a raft of important global news flows later today.