Pre FOMC Cable Leads As Minutes Reveal No More QE

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Market Drivers for September 18th, 2013
AU Westpac LEI shows good improvement helping Aussie
UK MPC minutes votes 0-9 on QE boosting pound
Nikkei -.32% Europe 0.29%
Oil $106/bbl
Gold $1305/oz.

Europe and Asia:
AUD LEI 0.6% vs. 0.0%
GBP MPC votes 0-9 on QE minutes reveal

North America:
USD Housing Starts 8:30
USD Building Permits 8:30
USD FOMC 14:00

Cable was the star of the show today in relatively quiet European session as currency markets awaited the FOMC decision on the taper later in North American trade. The price action in the pound was driven by the release of the MPC minutes which revealed that all nine UK monetary policy officials voted not to expand QE any further.

Some market analysts thought that one or two of the more dovish policy members would have cast a vote for more stimulus, but today’s announcement revealed that the BOE clearly thinks that there is plenty of accommodation in the system at the present time.

The news helped to propel cable to fresh highs at 1.5970 as the pair now eyes the key 1.6000 barrier. Sterling has been one of the best performers against the dollar amongst the majors, boosted by strong economic data out of UK.

Although the BOE has maintained a strongly dovish bias under the new governor Mark Carney the macro data from UK has shown a surprisingly robust recovery. The disconnect between the accommodative rhetoric and the better than expected growth has put the credibility of the central bank into question. Today’s 0-9 vote on QE may have been a tacit acknowledgement by the MPC that condition on the ground in UK are better than their initial forecast.

Whether cable is able to hit 1.6000 later today depends in large part on the actions of the FOMC. If the US central bank delays on its promise to taper its own QE program, pound as well as all the other high beta currencies are likely to soar in response to that action. One of the Fed’s biggest policy qualms at the moment is the fact that US data economic data is actually going the wrong way as consumer demand, sentiment and labor market conditions have all slowed over the past several months. With growth momentum waning, Fed’s actions may only exacerbate the slowdown.

The high betas may rally even if the Fed relents and tapers modestly at a 10 billion dollar pace, as the market has generally priced in that scenario already. Nevertheless, even a modest start of a taper could provide support for the dollar longer term as it would signal a significant change of course in US monetary policy.

Boris Schlossberg
Managing Director

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