Gyrating expectations for Fed tapering

Gyrating expectations for Fed tapering have left FX markets in somewhat of a limbo. Just as markets had shifted expectations for Fed tapering to next month or January 2014 Fed Chairman nominee Yellen managed to add a dovish spin on things by indicating strong support for ongoing Fed quantitative easing. The USD hasn’t been harmed too much as policy expectations in Japan and the Eurozone has also taken a more dovish slant leaving the EUR and JPY exposed to downside pressure. In contrast, GBP has benefitted from the Bank of England’s revisions to growth and employment expectations.

Yellen’s comments last week and some likely softer economic data releases this week including subdued CPI inflation, declines in retail sales and existing home sales, will likely cap US Treasury bond yields and the USD. Fed FOMC meeting minutes will have some bearing on market direction. Nonetheless, as noted above any pressure on the USD is set to be limited given the relatively dovish policy stances in other countries. Indeed, weak Eurozone and Japan Q3 GDP released last week have led to expectations of more monetary policy action from both the Eurozone Central Bank and Bank of Japan. Consequently EUR/USD will struggle to sustain any recovery above 1.3500 and USD/JPY will find a stronger footing above 100.

GBP/USD has retained a degree of composure but GBP bulls are better taking a long position against EUR where further GBP gains are likely given revelations in the BoE quarterly inflation report that the unemployment threshold will be hit sooner than expected, indicating higher policy rates earlier than forecast. Although the EUR may find some solace from better data this week in the form of flash manufacturing surveys and increases in the German ZEW investor confidence and IFO business confidence surveys any EUR upside will likely remain limited given expectations of further monetary easing by the ECB in the wake of very subdued inflation pressures.

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