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Yellen’s Fed – What Does This Mean For The USD

After an eventful 8 years as head of the Federal Reserve, Ben Bernanke has chaired his last FOMC meeting and hands the reins over to his successor Janet Yellen with little drama. He exits with the unemployment rate down to 6.7% from a peak of 10% and a relatively optimistic outlook on domestic growth.

There were no surprises from the Fed last night, with the monthly pace of asset purchases cut by another $10 billion to $65 billion. There were no other meaningful changes to the FOMC statement and forward guidance was left unaltered. You have to expect changes to the forward-looking language will be looked at in more detail in March, when any decisions could be fully explained by new Fed Chair Ms. Yellen during her first post-FOMC meeting press conference. The market expectation is that the Fed will announce a $10bn reduction in their monthly purchase pace at every meeting until September, when they believe the program will end.

Overnight major currency markets demonstrated relative calmness, but we did see some weakness in emerging markets and equities. The Fed have demonstrated that they are prepared to continue with the QE taper programme in spite of the weaknesses in emerging markets and equities, and demonstrated that it would only be influenced by developments that affect the US economy.


In the currency markets risks look skewed for a move lower in EUR/USD, having tested the 1.37 level a number of times and failed to sustain a break above. Additionally the EUR may come under pressure from the fallout in Eastern European economies and in particular Turkey where their central bank decided to raise interest rates from 7.75% to 12% more than double what traders were expecting in an effort to support the Turkish Lira over the past 48 hours. While the market is focused on the events that are developing in the Turkish, South African and Argentinean economies it is worth remembering US payrolls are due out a week tomorrow.  The risks are around a falling unemployment rate and a subsequent stronger USD. It is also worth noting that the S&P 500 is sitting on the 100 day moving average and trend line support. A break lower of this would likely be USD positive. If we take all this into account the 200 day moving average at 1.3376 looks to be a target for the 1Q14.

In the UK the lack of domestic inflation pressure remains the single biggest reason to suppress speculation about rate hikes this year, which in turn should limit the upside in GBP/USD to below $1.70. The GBP markets have been eventful of late. There is also a considerable amount of event risk in the UK between now and the 12th Feb. We have the BOE meeting on the 6th and the Inflation meeting on the 12th. With the unemployment rate hurtling down to near the 7% level, the market is bracing itself for further forward guidance. Naturally the market is already speculating how this is going to be conveyed, more than what they are planning to signal. The risks are skewed to a weaker GBP for me post 12th Feb as I believe their will be additional forward guidance similar to the US where the BOE will publish their forward projection of future interest rate expectations (i.e. BOE detailing when they expect the next interest rate hike). Therefore for me GBP is like to trade higher into the key February events but is likely to come under pressure if further guidance is provided and GBPUSD may trade low 1.60s.


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