The USD gains strength alongside with the specs on Fed tapering the asset purchases by the end of the year. The fx trading is highly influenced by the heavy data stream this week. As widely expected, the UK unemployment rate remained unchanged, while the single hawk, Waele, sent the cable to 1.5506 after the MPC minutes release in the morning. The better-than-expected GDP growth in the Euro-zone didn't gather enthusiasm. Due in the afternoon, the US July PPI numbers are the next data to watch.
GBP-Rally on MPC Minutes
Even though the unemployment remained stable at 7.8% in July data, the Cable rallied more than 50 pips on hawkish BoE minutes. In opposition to last meeting's unanimity, the Governor Carney failed to gather all voices regarding the implementation of the forward guidance. While the linking of the policy decisions to a Fed-like 7% unemployment target was agreed on eight-to-one, Martin Weale's vote was against the adoption of such strategy due to the inflation-based "knock-out" clause (saying that if the inflation is half percent higher than the 2% targeted in 18-24 months, the forward guidance will be "knocked-out"); Weale found the time horizon too long at his taste. One may say that the reaction was far beyond for a single vote, yet the markets just re-expressed their concerns on the effectiveness of the new policy. GBPUSD rallied to 1.5506. Offers are still tight at 1.5530/50 (Fibonacci level/downtrend top), while the strengthening dollar suggests limited upside.
Fed Tapering back in Talks
In his speech in Atlanta yesterday, Fed's Lockhart said that the tapering in bond purchases may be announced at any FOMC meeting ahead of us before the end of the year. The hawkish comments helped the markets to focus on 0.5% increase in retail sales ex-autos, rather than the slowdown in the total retail sales. The specs on Fed tapering revived, USD came broadly in demand. The US 10-year government bond yield jumped to 1.7290, while the dollar index (DXY) found support at 81.70.
At this stage, we believe that the markets have already priced-in the start of the QE exit before the end of the year, yet the amount of the tapering is the main topic (rather than if the Fed will or not taper). According to the Bloomberg survey, the median analyst expectations bet on USD 10bn decrease in monthly asset purchases (from USD 85bn actual to USD 75bn), while half of the economists have predicted a reduction in bond purchases at September 17-18th FOMC meeting in last month's survey. Now, if Bernanke persists on "substantial" improvement in the labor market, the latest nonfarm payrolls clearly show that the improvement is not stable yet and the tapering should not start as soon as September. Besides, the effects of the fiscal cliff may continue to slowdown the progress in job markets for the coming months. On the other hand however, the record high Fed balance sheet at USD 3.59trln and the colossal budget deficit suggest action. The million dollar question is: when?
IMOH, Clement I.
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