FED shocks markets last night with a dovish move of keeping its QE programme unchanged

Tom Tong19/Sep/2013Currency Updates


Markets were stunned yesterday. The FED elected to keep it’s asset purchases steady at 85bn a month. It also downgraded its growth forecasts for this year and next, thus reflecting its concerns over long term rates on mortgages, loans and employment levels. It now expects 2% to 2.3% growth this year down 0.3 percentage points from its previous projection. Moreover, it expects unemployment to fall to 7.2% this year down just 0.1% from June’s forecast. Investors had widely expected the FED to start to wean of it’s huge bond buying program. This result displays that the U.S economy is not nearly as healthy as the market perceives it to be. Equally, Bernanke said that recent economic data did not warrant immediate action. This move suggests the FED was massively alarmed by the sharp rise in long term interest rates that proceeded it’s June announcement of a likely scenario for tapering its QE. The language and tone of the meeting was also overwhelmingly dovish. The release of the minutes from the FOMC August meeting display that all are backing Bernanake to pull back on QE this year, however there is disagreement as to when this will be applicable. Perhaps signs of confusion among the FED.

We must remember that the impending political storm over the U.S debt ceiling is a huge influence. With congress still yet to agree acceptable levels of debt for the U.S the last situation wanted is huge swings in the economy fueled by drastic changes on FED policy. Equally with varied data over the past quarter the FED can only be too careful. Bernanke commented- “The extent of restrictive fiscal policy remains unclear, and upcoming fiscal debates may involve additional risks to financial markets and the broader economy” In the face of rising optimism about a U.S recovery, the FED clearly does not share the markets bullish sentiment to the same extent. The unease is understandable, too few Americans have jobs although unemployment is falling the labour force is the smallest it has been in decades. We have 1.8mln less Americans in the labour force since the start of the crisis. If they were still in the labour market the true level of unemployment would be 11.2%. Real wages are falling in many parts of the U.S, mortgage rates are up and many of the extra dollars running off the press are winding up in Wall St instead of the streets normal Americans walk.

As a result of this unexpected turn of events markets have boomed. The dollar depreciated against its most traded pairs. This continued over the Asia session and the rally is expected to continue when London opens. Naturally the result also spurred equities. The Dow Jones Industrial average reversed an earlier decline to close at a new yearly high. U.S treasury yields took a rough dive.

Data of merit today is jobless claims and MoM home sales.


Yesterday we saw the Bank of England policy makers voting unanimously with 9-0 votes in favour of keeping the bond-purchase program at £375bn as well as the benchmark interest rate at the record-low of 0.5%. The decision came despite the general agreement that the British economy has shown increased signs of growth and strengthening . BOE staff now estimate growth of 0.7% this quarter, up from 0.5% last month. The forward agreement that the British economy has shown increased signs of growth and the strengthened guidance launched in August by the new governor of the BOE Mark Carney pledged that the rates will remain at the current levels until unemployment levels reach the 7% threshold assuming inflation figures remain under control.

Following the release of the MPC minutes, Sterling extended its gain against the USD, thus rising to its highest level since Jan.18. With respect to the EUR, we have seen sterling strengthening again reaching a fresh 8-month high.

Out of the UK there has been increased speculation of an arising housing bubble with prices in London rising 9.7% in the year to July according to data released by the Office for National Statistics. It has been estimated that a cost of a new home would be 12 times the capital’s average salary which would be unaffordable to many. Even though, chancellor George Osborne has denied that the UK housing market is overheating, further increases might eventually lead to pulling the plug on the Help to Buy mortgage guarantee scheme which is due to start at the beginning of 2014.

Out of the UK today we are looking at Retail Sales MoM as well as CBI Industrial Order Expectations being released. Retail Sales are forecasted at 0.4%, a fall from the 1.1% for the month of August. The figure is considered as Tier 1 data as this is the primary gauge of consumer spending which accounts for the majority of the overall economic activity.


Forced transfers and scheduled civil service slashes, led to Greeks from a wide spectrum of professions to go on strike in in the capital yesterday. This upset is a direct response to the troubled nations plan to assign 25,000 civil servants to a lowered wage whilst decisions pertaining to their reposting or dismissal are finalised. Furthermore, a reduction of 15,000 jobs by 2015 is to be imposed. Though the country’s unemployment currently stands at a record 28%, the government maintains the rhetoric that its public sector is far too large and must be amended.

These measures, stipulated by the European Commission, ECB and IMF are part of the bailout terms aimed at the next 1bn euro instalment. To date, Greece has received roughly 240bn euros in aid from the “Lending Troika”, with an additional requirement of nearly 10bn in order to seal the funding difference. Prime Minister Samaras remains optimistic asserting that the countries fiscal discrepancy will soon be cleared.

Further to this we also saw Portugal facing a potential credit-rating downgrade yesterday. Constitutional court challenges to measures intended to cut spending and Portugal’s weak economy prompted Standard & Poor to place it on their CreditWatch negative list, leaving 90 days to decide on a decision whether to downgrade.

There was minimal data out of the eurozone yesterday along with a quiet day in terms of data today.


Written by Tom Tong

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