The FOMC and the US Dollar
Our predictions for the FOMC in our weekly recommendation newsletter and daily blog updates were highly accurate, with Ben Bernanke giving a clearer indication as to future US monetary policy. The US dollar strengthened across the board, with tapering of US stimulus to begin before the end of the year. These comments also confirmed our forecasts for timeframe of the scaling down. Having left rates on hold once again at 0.25%, the Federal Reserve chairman reported that their USD85bln monthly assets purchasing would be reduced by the end of the year and completely wound down by the middle of next year if the US economy continues to perform as the central bank foresees. EUR/USD subsided from just above 1.3400 to 1.3275, with this move being extended lower to 1.3210 during the European morning session. Similarly cable dropped from around 1.5670 to 1.5490, and then slipped to 1.5420 when London opened. USD/JPY has rallied over 3% from 95.10 to back above 98.00 and AUD/USD has plummeted through 1 year lows to 0.9170. The Federal Reserve also released their most recent forecasts for US growth, predicting the economy will expand around 2.5% this year, with inflation drawing towards the 2% target.
Roundup: The comments overnight from the US central bank has certainly settled a few unanswered questions, but if market participants believe that this pivotal moment marks the end of a naturally weaker dollar, then a step back might be in order. Tapering of monetary stimulus by the end of the year has established the Federal Reserve’s mindset for the short term, but at the same time focus will now likely shift to a longer term outlook and center on when the Fed could wind down completely. As Chairman Ben Bernanke signalled last night, such events are dependent on how the American economy performs over the coming year, and one could consider that the banks targets are somewhat bullish. With China’s economy seemingly slowing and the global economic climate still in a delicate balance, the Fed’s growth forecasts in our opinion will require some good fortune in order to be achieved, with their unemployment rate objective of 6.5% by end of 2014 also needing a consistent improvement to be attained. The Federal Reserve’s upbeat manner is admirable and breath of fresh air, but in our view could prove to be a little too optimistic. Watch this space.
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