FOMC fails to provide direction to markets on QE tapering with release of minutes

Tom Tong22/Αυγ/2013Currency Updates


Sterling rose against the euro and held at a two month high against the dollar as trading closed in London yesterday, shrugging off weak UK public sector borrowing data as investors stayed focused on when monetary policy will be tightened.

Public Borrowing showed a deficit of £62m last month, the first deficit for the month of July since 2010 and much worse than the forecast surplus of 2.45bn. However, data failed to take the steam out of sterling, with the currency rising 3% against USD and 2.3% against EUR year to date. This gain is predominantly down to improving UK economic data, with manufacturing activity in the UK surging to a two-year high in the three months to August. The CBI’s industrial trends poll, published on Wednesday, showed a net balance of 16 per cent of manufacturers reported a rise in output over the past three months, up from 7 per cent in July. The strong figures offer further evidence that businesses in the sector, which was hit hard by the economic crisis, are starting to benefit from the nascent economic recovery.

Earlier in the month, Governor Mark Carney pledged to keep UK interest rates low until unemployment falls to 7%, which the central bank see as unlikely for another 3 years. However improving economic conditions have cast doubt on this timetable.

There is no top-tier data out of the UK today and investors are likely to be looking to the large flow of data coming out on Friday for further information on the performance of the UK Economy.


Yesterday saw EUR/USD vary significantly off the back of FOMC minuets, underlining dollar strength and placing emphasis on the confidence that tapering will not be postponed much longer.

Yesterday saw German Chancellor Angela Merkel attack the notion that Greece may be permitted another debt reduction. Whilst Merkel spoke in Germany, the ECB was in the Greek capital inspecting the troubled state’s developments. Eurozone finance ministers were already due to consider next April whether Greece will need more bailout money on top of the €172bn in its current aid package. By then, full details of Greece’s budget performance in 2013 will be available. However, even if Greece achieves its target of a balanced primary budget before interest payments on debt, it will need extra funding in the second half of next year.

Today we will see Flash PMI indices for the service and manufacturing sectors in Germany, France and the eurozone, which will meet with close examination as the market looks to evaluate whether Europe’s recession has come to a close.

There is no other data of much significance out of the Eurozone today.


Yesterday saw the release of July’s FOMC minutes. Markets were primed on any indication as to the FED’s plans for a tapering of their QE program. At present the FED is buying $85bn of government bonds with the intention of continued stimulus. US equity markets, employment figures and general economic data have now improved to the stage where the FED are considering unwinding this program. The general consensus is that QE will fully curtail once unemployment hits 7.0%. Current levels are 7.6%. However with other tier 1 data also improving faster than anticipated there was talk of reducing QE by 10bn per month.

The reality was somewhat different with the FED failing to give markets clarity. There was a split in conviction as to which action to take. Some of the board were reserved on the prospect of tapering, others suggested that it may be time to decrease the volume of purchases. The Fed’s committee continued to suggest continuous improvement in economic data will prompt reduction in QE. Ultimately, however, the exact timing remains cloaked in tone and hearsay. This uncertainty threw the markets into confusion, with traders openly slating the Fed on their lack of conviction and proper communication. The next drama will come with the release of August employment figures which will either escalate or reduce the speed at which QE is reduced. Analysts widely still expect a September taper is likely.

U.S existing home sales also jumped 6.5% in July, alongside mortgage applications these are the highest levels prior to the crisis. Similar to the U.K property market this has been fuelled by low interest rates, increasing availability of loans and mortgages and a widely bullish outlook on property price rises.

Naturally yesterday’s data release prompted vast market movement. Dollar rises were seen across the board. The greenback rose 0.1% against euro, 0.2 against the yen. The Greenback also strengthened against sterling. U.S 10 year treasury yields are also hovering near a 2 year high.


Written by Tom Tong

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