The Pound to US Dollar exchange rate (GBP/USD) grew by around half a cent yesterday, reaching a highpoint of 1.6472, as support for Sterling remained remarkably strong.
During the evening the Federal Reserve released the Minutes report from its FOMC meeting in December – the meeting that led to the first tapering of QE3. The Minutes showed that policymakers are cautiously optimistic that they will be able to reduce the asset purchasing target gradually over the course of the year.
Traders had hoped for hints as to the Fed’s next move, but the tone of voice suggested that each future decision would remain data dependent and therefore difficult to predict:
“Members stressed the need to underscore that the pace of asset purchases was not on a preset course and would remain contingent on the committee’s outlook for the labour market and inflation as well as the assessment of the efficacy and costs of purchases”.
The last point – the “efficacy” of the programme – relates to the positive impact that the Fed perceives QE3 to have on the US economy. The majority of policymakers voiced concerns that future asset purchases could have a “declining” benefit, largely due to the potential for “excessive risk-taking in the financial sector”, which could potentially lead to the creation of another asset bubble.
Some members argued that the decision to cutback on asset purchases during December was “premature”, whilst others pushed for a much rapider exit from the quantitative easing scheme.
Overall the cautionary FOMC Minutes report was seen to curb taper speculation, but only slightly, as it became apparent that any future reductions in stimulus would be dependent on further improvements in the labour market and the Consumer Price Index.
The Pound to US Dollar exchange rate fluctuated just above technical support at 1.6440 following the release.
Earlier in the day GBP/USD rallied from below 1.6400 as demand for the Pound proliferated due to continued speculation that the Bank of England will raise interest rates before the Federal Reserve.
The fact that Sterling remained resillient following a significantly stronger-than-expected US ADP Employment Change print of 238,000 suggests that investors are willing to push ‘cable’ higher, even when the Fed’s QE3 programme has been fully wound down. The impressive labour market score beat analysts’ forecasts of 200,000, and bodes well for a strong Non-Farm Payrolls report on Friday.
If GBP/USD comes through the NFP report unscathed, and this point is even more applicable if the Payrolls number is strong, then it is entirely likely that Sterling’s uptrend will continue over the next few months.
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