FOMC Resorts to Further QE3 Tapering

Along expected lines, the FOMC tapered its asset purchases by a further $10 billion yesterday. However, with the change in leadership and a new line up of policymakers, it remains to be seen what direction the Fed’s policy takes in the upcoming months. Today’s important US economic data will offer further insights into the strength of recovery during the fourth quarter. At home, Mark Carney continues to stress the need for a further pick-up in economic recovery before tightening policy, while housing market gains continue to raise fears about a potential bubble. In Europe, following the positive German unemployment report, a slew of Euro zone sentiment indices and the German inflation numbers will gain market interest today.

Pound Sterling – UK Markets

The Pound momentarily breached the 1.66 mark against the greenback early yesterday, but failed to hold on to its gains and traded largely under pressure against the US Dollar ahead of the FOMC monetary policy meeting later in the day. The better than expected housing market report yesterday had lifted Sterling against the US Dollar, as the domestic housing market continued to heat up with the thirteenth successive monthly rise in British house prices for January, despite the BoE’s withdrawal of “Funding for Lending”, the mortgage support scheme. Meanwhile BoE Governor, Mark Carney, reinforced that low unemployment and easing inflation alone will not warrant a hike in interest rates and that more signs of domestic economic recovery are needed to alter the central bank’s policy stance. Meanwhile, Sterling is trading on a weaker footing against the US Dollar this morning after data just out showed a further rise in UK mortgage approvals for December. Later today, the string of US and Euro zone economic releases and the overnight domestic consumer confidence report will be closely tracked by Sterling investors for further direction.

US Dollar – US Markets

Despite the Fed tapering its monthly asset purchases by a further $10 billion to $65 billion yesterday, the widely expected move drew little movement in the greenback against the majors, especially since the central bank failed to offer any hints about increasing the pace of QE3 trimming in future. However, the US Dollar had moved higher against the majors in the run-up to the FOMC meeting and maintained its gains after the central bank indicated that the domestic economy and labour market are showing signs of picking-up. Meanwhile, the US Dollar has strengthened against its peers in today’s trading session. Market participants will keep a close tab on the domestic GDP print later today, which is likely to show that growth in the US economy eased during the final quarter of 2013. Additionally, consumer spending trends will also be closely scrutinised, especially in the wake of improving consumer sentiment numbers lately. Furthermore, the initial jobless claims report will be keenly eyed ahead of next week’s non-farm payrolls print and also could sway trading sentiment in the Euro-US Dollar pair in the session ahead.

Euro – European Markets

The just out positive German labour market report has arrested the single currency’s early morning losses against the greenback in today’s trading session. While the unemployment rate remained unchanged, the number of unemployed people in Germany continued to fall, albeit at a slower pace, for January. Furthermore, the Spanish economy expanded for the second consecutive quarter. However, Euro investors will keenly follow the consumer price inflation report from Germany later today and an upside surprise on this front will offer further support to the common currency against the majors ahead of tomorrow’s Euro zone inflation print. Additionally, the Euro zone consumer and business sentiment indices and the string of US macro data will gain market attention in today’s session. Meanwhile, the common currency traded broadly lower against the US Dollar yesterday. Apart from the Fed policy meeting, ECB policymaker, Christian Noyer’s comments that the Euro’s strength will negatively impact the central bank’s inflation target contributed to the single currency’s weakness against the greenback yesterday.

Other Currencies – Highlights

The New Zealand Dollar has continued to weaken against its major counterparts this morning as the Fed’s tapering decision and the RBNZ maintaining status quo on its policy weighed on the currency. While the Fed trimming its bond purchases underpinned demand for the greenback, the failure of the RBNZ to offer positive surprises in its policy meeting today further pressurised the Kiwi Dollar against the majors. Additionally, an unexpectedly weak Chinese manufacturing PMI data added to the Kiwi Dollar’s woes. However, Graeme Wheeler, the RBNZ Governor, indicated at a possible tightening in policy in the near future as economic recovery gains strength and to counter rising inflationary pressures. Against this backdrop, the central bank Chief’s speech later today will be closely watched for further hints about the same. Looking forward, investors in the Kiwi Dollar will keep a tab on the New Zealand trade data later today for further direction. Moreover, news flows emanating from both sides of the Atlantic will prove crucial for the New Zealand Dollar against the majors today.