Improving US Outlook Denies QE3

Last night’s Fed meeting was a lesson in expectation management. The FOMC had a difficult decision to make, and it had been made all the more tricky by recent improvements in data, in particular the US jobs market. The Fed acknowledged this improvement by saying that it expected “moderate” growth over the coming year and this to be backed up by a gradual decline in unemployment.

Equities took to this like a duck to water and pushed US markets to the highest level since the middle part of 2008. The dollar also found strength in the news as well with GBPUSD coming back into the mid-1.56s and EURUSD trading consistently below 1.31 in the aftermath.

The dollar’s rally was started yesterday by a good US retail sales number which rose by their fastest pace for 5 months while the results of a recent bout of stress-testing on US banks also soothed investor panic. The Fed released the results of the stress tests 2 days early following JP Morgan’s decision to announce that it had passed them in a release to shareholders. 15 of the 19 banks passed the tests with Citigroup the major failure.

GBPEUR bounced back from oversold levels yesterday in good order and now resides above the 1.20 level. Sterling was helped by some corporate buying but it was euro weakness that was the main driver of this move. A report from the EU/ECB/IMF troika that Greece will need further budget cuts within 2 months should it become evident that it is missing deficit reduction targets became public yesterday. This will cause further division come election time mid-April.

Sterling may be hard pressed to stay above 1.20 this morning with the publication of the latest round of unemployment figures. Unlike the US, the UK’s unemployment picture has gradually deteriorated in the past 6 months and expectations are that they will remain that way through 2012. The unemployment is expected to stay at 8.4%, the highest since 1996 while around 5,000 more people are expected to be new JSA claimants.

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Latest exchange rates at time of writing