The Pound to US Dollar exchange rate (GBP/USD) declined by around a cent last night in response to the FOMC Minutes from July’s meeting.
The latest FOMC Minutes report showed that policymakers at the Federal Reserve are keen to reduce the stimulus programme at some point in 2013, but only if economic data continues to warrant the taper. The Minutes said:
“A few members emphasized the importance of being patient and evaluating additional information on the economy before deciding on any changes to the pace of asset purchases”
Conversely, other members were seen to signal that “it might soon be time to slow somewhat the pace of purchases”. Although the Fed struck a decidedly neutral tone, it was the comments regarding tapering that caught the attentions of traders and influenced Sterling’s descent from a 2-month high of 1.5718 to 1.5616. With policymakers seemingly divided it is possible that the ‘Septaper’, if forthcoming, will be less prominent than previously thought: maybe involving a reduction of $10 billion asset purchases a month rather than the anticipated slowdown of $20 billion.
In terms of downside pressures to the US economy, which are preventing the Fed from slowing QE3, the Minutes noted that: “increases in mortgage rates, higher oil prices, slow growth in key US export markets and the possibility that fiscal restraint might not lessen” are having a negative impact on the world’s largest economy. The Fed is also worried that inflation may not reach its self-imposed 2.0% target for a long time, and a reduction of stimulus would only accentuate the soft inflationary outlook.
Another interesting point that was brought up in the FOMC report is the possibility that the Fed may look to mitigate the chaos within financial markets when stimulus is shutdown by pushing the 6.5% Unemployment threshold lower. This would remind investors that interest rates are set to remain at record low levels for a long, long time still and would help to alleviate some of the problems associated with the taper: such as flights to safety out of emerging markets, government debt volatility and amplified risk aversion. However, this idea is fairly unlikely because any adjustment of the Fed’s forward guidance would undermine the significance of the threshold completely and would raise question marks as to whether the Unemployment target could be raised later down the line if economic conditions were seen to support a premature rate hike.
Although the Pound lost out on just under a cent against the US Dollar in response to the FOMC Minutes, Sterling managed to rack up a nice set of daily gains versus its other major currency rivals. GBP/EUR advanced by around a third of a cent, whilst the commodity currencies fared particularly badly.
With a dreadful domestic Retail Sales forecast weighing over the Canadian Dollar, GBP/CAD struck a 3-year high of 1.6437 last night. The Pound to Australian Dollar also hit a 3-year high, appreciating by around 1.8 cents to 1.7445 as risk sentiment staled. Sterling completed the set with an impressive 2.3 cent rally against the New Zealand Dollar, sending GBP/NZD to a near-2-month high of 1.9994.
Later on this morning the Eurozone Composite PMI score is expected to come in at an encouraging score of 50.9. Although the Euro’s footing is far from secure at the moment, with rates set to remain low for “a prolonged period of time”, Greece reported to need a third bailout and fears escalating that the ECB may introduce a new liquidity boosting scheme to spur credit growth, the single currency still has the potential to claw back some losses against the Pound if the PMI data overshoots analysts’ expectations.
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