Fed Defies QE Expectations

The greenback was decimated yesterday after the Fed acted against the popular opinion and decided to keep its monetary stimulus in place for the time being. Although the central bank might only have delayed the inevitable, it remains to be seen whether stimulus measures will remain intact until a change in the Fed’s helm scheduled in 2014. In contrast to the dovish stance adopted by the Fed, the BoE minutes revealed that the central bank remains averse to adding a fresh set of stimulus to its arsenal, thereby offering further reasons for the Pound’s out performance against its peers in the recent past. However, today’s retail sales data was unexpectedly weak, reversing its monthly growth trend as demand for food fell.

Pound Sterling – UK Markets

Buoyed by the Fed decision to keep its ultra loose monetary policy in place until further signs of economic improvement, the Pound breached the 1.61 mark against the greenback for the first time in eight months yesterday. Earlier in the day, Sterling traders hailed the BoE minutes of the last policy meeting which revealed a unanimous decision of policymakers to keep interest rates and assets purchases at current levels. Furthermore, the central bank raised its economic growth forecast for the current quarter to 0.7% from 0.5%, further highlighting optimism surrounding the nation’s growth prospects. Meanwhile, data just out has revealed that annual retail sales in the UK continued to rise for August, albeit at a slower pace, weighed down by lower consumer spending on food. Later today, the CBI industrial trends survey will be eyed for early indications about the health of the UK manufacturing sector during this month. In the aftermath of the Fed’s unchanged policy stance, today’s slew of significant US economic data, particularly initial jobless claims and existing home sales, will be eyed for further direction to risk appetite.

US Dollar – US Markets

Against all expectations, the Fed kept its monthly asset purchases programme unchanged at its policy meeting yesterday, thereby weakening the greenback sharply against its major counterparts. Accompanying the overall dovish tone, the Fed slashed its economic growth outlook for 2013 and 2014. At the ensuing press conference, Ben Bernanke, opined that more evidence of sustainable economic development will be required before considering any policy tightening measures. This has now shifted market focus to the next two policy meetings remaining in this calendar year. The Fed President also reiterated that interest rates will only be raised when the unemployment rate drops further. Against this backdrop, initial jobless claims data due later today will be eyed for further insights into the nation’s labour market. After yesterday’s knee-jerk reaction, the US Dollar is limiting losses against the Euro in today’s session. Apart from today’s labour market data, markets will also monitor existing home sales data, especially in the aftermath of latest housing indicators showing signs of fatigue due to higher mortgage rates.

Euro – European Markets

The Euro climbed to a seven-month high against the US Dollar and toppled the 1.35 mark yesterday following the FOMC meeting in which the Fed unexpectedly decided to continue with its current quantitative easing measures. Further, at his post-meeting press conference, the Fed Chairman sounded dovish, as he opined that further improvement in the economy is required before considering the tapering of QE3. This has led market participants to believe that an early liquidity withdrawal is not on the cards. Meanwhile, a day after the President of Cyprus announced that the country’s capital control measures will be lifted by January 2014, the European Union and the IMF have warned of “considerable downside risks” to the island’s economic prospects, citing the worsening unemployment situation. In the meantime, the single currency is trading in a tight range against the greenback in today’s trading session amid a lack of domestic economic triggers. In the absence of major European economic news today, the Euro-US Dollar pair will be influenced by macro releases across the Atlantic, particularly the initial jobless claims report and any negative surprises on this front will provide further boost to the common currency.

Other Currencies – Highlights

The better than expected second quarter GDP data has propelled the New Zealand Dollar higher against the majors this morning. The upbeat second quarter GDP report, accomplished on the back of a booming housing sector, has added to recent signs that the economy was recovering from the effects of a severe drought. Additionally, the Kiwi Dollar remained supported on the Fed decision to delay QE3 tapering, at least for the time being, increasing demand for high yield currencies. With no major domestic economic releases due today, initial jobless claims and housing sector data in the US will be eyed for further direction to risk appetite.