For a brief while the focus of attention of market participants and commentators stepped away from the intense scrutiny of the Eurozone yesterday and crossed the Atlantic for a look at the US economic backdrop and the implications for US monetary policy as narrated by Federal Reserve Chairman Bernanke.
Before the announcement the discussions were centred around the recent above-consensus economic data and the implications (as seen by the FOMC – Federal Open Market Committee) for US monetary policy. The reality however was subtle at best.
“Can’t give you more”
The Fed left the target interest rate at zero to 0.25%, suggesting that the economy is “Expanding moderately as global growth slows”. The decision had one dissenter, Evans, who was in favour of further easing. Bernanke was perhaps surprisingly quick to acknowledge the improvement in consumer sentiment and spending (considering that the improvement has been concentrated to the most recent data and yesterday’s retail sales were disappointing) and the broader economic backdrop which he suggested “has continued to advance”. However, despite the marked improvement in the unemployment rate in November the central line is that unemployment remains elevated, business investment is increasing at a slower pace and “Financial strains still pose significant downside risks”.
“Whatever you want”?
The statement clearly highlighted that the Fed “is prepared to employ tools to boost (the) recovery” and stated explicitly that rates will remain “exceptionally low” through “at least mid 2013”. This remains in line with the central projection of markets which have the first rate hike from the Fed ‘priced in’ for Q1 2014, which is as it was before the statement, suggesting that the Fed did nothing to change monetary policy expectations, despite the recent improvements in the backdrop.
“I Didn’t mean it”
The remaining issues of the eurozone compact were brought to the fore yesterday as the worst fears of many became a reality. The Irish Prime Minister was quoted as saying that “Ireland will hold a referendum on the EU treaty if necessary”. Whilst the intimation was subtle (if necessary), the implicit connotation is that the ‘agreement’ of the EU17 becomes moot if countries within the euro have to consult the democratic process. Ultimately this adds to the uncertainty and not “likely to help bond markets” as Sarkozy proclaimed on Monday.
“Euro Summit is not enough to help the region's ratings” – Moody’s
“Down, down deeper and down”
A large focus of the FX market today will be on the significance of the 1.3000 level and the technical dynamic of the ‘barrier option strikes’ that encompass it. Overnight we have seen a couple of attempts at the 1.30 level, set in motion by the FOMC statement. For now at least the bids that lie ahead of the psychological level have contained the down move, however, the size of the bids ahead of 1.3000 will be outnumbered in size by the amount of stop loss orders to sell EURUSD should the 1.3000 level be breached.
“Rockin’ all over the world”
GBP remains relatively well supported in the current environment as the uncertainty surrounding the Eurozone continues to dominate. The USD has clearly taken pole position on the FX grid, but EURGBP still remains a core trade view of mine into the end of the year. Employment data this morning will be important in terms of broader UK specific sentiment, and monetary policy implications for the UK going forward. However, the biggest risk and therefore arguably the biggest driver of monetary policy in the UK remains the events of the Eurozone. This will not change until there is a credible plan for Europe.
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