- FOMC expresses confidence in growth pick-up; disappoints those looking for stronger balance sheet commitment
- USDJPY looking on slightly firmer ground above Y79.50
- GBP loses significant ground, but we stay short
Tuesday night’s good news by way of successful confidence vote in favour of the incumbent Greek Prime minister and new Cabinet failed to resonate in Wednesday’s FX markets amid continued low risk appetite within the global macro-investment community and as markets sat back waiting for the latest fare from the FOMC and Fed Chairman Bernanke.
The FOMC disappointed those hopeful for a stronger commitment to the current policy stance once QE2 ends next week, via the application of the ‘extended period’ language to the Fed’s balance sheet size and too a possible commitment to extend the average duration of bond holdings as maturing assets are reinvested. In the ensuing post-FOMC press conference, Fed chairman Bernanke made clear the Fed had made no decisions here. After a suggestion in the WSJ last week that they would, this then portrayed a picture of a less unified Fed, with the dovish ‘troika’ of Bernanke, Dudley and Yellen not necessarily holding sway. More will be revealed when the minutes of Wednesday’s meeting are published, but with the Fed chairman also making clear that current conditions in terms of inflation in particular are much different from last year when QE2 was agreed upon, one thing that is abundantly clear is that the bar to QE3 is exceptionally high. This should offer the dollar a modicum of support in coming weeks, though the very limited back-up in US Treasury yields in the wake of the FOMC meeting statement and Bernanke press conference means this is far from guaranteed. USDJPY at least has found a stronger footing above Y80, and amid reports of deep and varied local buy orders just beneath Y80, we are more confident that the Y79.50 key support level will hold near term.
EURUSD looks like grinding higher at best this side of next Thursday’s budget vote. Successful passage generally assumed (helped by the spectacle of EU suggesting reduced conditions for a EUR1bn+ structural aid grant in order to sweeten the bitter pill of new austerity measures) though amid indications Wednesday that Greek ministers are still balking at the commitment to state asset sales, fearful that this is a major flashpoint for deeper social unrest, there is still scope for a relief rally on passage of the Budget measures that should at least see us stretch above 1.45.
Thursday’s data/events calendar is probably not going to be hugely instrumental for the next move, with US initial unemployment claims, New Home sales and ‘flash’ Eurozone PMIs the data highlights. Modest slippage in the latter is expected for the composite reading (to 55.2 from 55.8) but if that is all we get, we would further question the current market complacency regarding the future pace and extent of ECB policy tightening. Claims are seen holding near last week’s 414k level while home sales are expected to fall by 4% after last month’s 7.3% (‘dead cat’?) bounce. BNPP economists expect a fall closer to 10%.
We continue to run with short GBP in the wake of latest MPC minutes, versus in particular NOK and AUD.
BNP Paribas
Corporate & Investment Banking