Go Ben or go home

• Fed extend ultra-low rate guidance until mid-2015

• Also increase asset purchases with $40bn with job market barometer

• EURUSD piles through 1.30, GBPUSD trades above 1.62

• Equities globally all push higher on fresh recovery hopes

The market wanted action from the Fed and the Fed responded last night in a fashion that tends to suggest that they are more worried about the US economy than they have previously been letting on. The dollar was once again kicked hard, pushing to a fresh 4 month high against the EURUSD above 1.30. GBPUSD was unable to extend as much, but still sits happily above 1.61.

The situation necessitated a different solution from previous enacted by the Fed and that is what they got. The key phrase in Mario Draghi’s speech last week was “unlimited”; today’s was “open-ended”.
This means that the time frame and indeed, the size of this easing plan is not set and could go on for as long as is necessary. It would only stop when the economy is fixed or when economic factors such as inflation, which the Fed seems happy to encourage higher at the moment, reach intolerable levels.

The key fundamental indicator in the run-up to this meeting has been the jobs market in the US – those who were sat on the fence about whether the Fed would ease this month had their minds changed by the poor NFP number a week ago. There is quite a distinct linkage in this latest QE plan to the jobs market with $40bn a month of Mortgage Backed Security buying almost being levered to how many jobs are created within a certain month. Not enough? The Fed will continue buying.

The press conference that followed the decision saw a Fed Chair who would not be drawn on what kind of level of improvement the Fed would be targeting – it’s a kind of “we’ll know it when we see it” idea it seems at the moment. The most interesting part of the press conference was Bernanke’s opening comments which certainly suggested to me that he and other members of the board are a lot more concerned about the macroeconomic outlook for the US than most had expected.

The other part of the plan that we foresaw was an extension of the ultra-low rates guidance until the middle of next year. This tackles the price stability part of the Fed’s mandate whilst complementing the decision to add more QE to the mix.

The focus of all asset classes through the past 6 weeks has been the wills and moves of the ECB and the Fed. With these decisions now made we can start looking at the fundamentals of each economy with increased clarity.

GBPEUR has been dragged lower on the news as EURUSD remains more of a cross to be bought than GBPUSD at the moment. We think we could see this negativity extend in the coming week or so with a low of around 1.23 likely.

With the decision by the ECB last week to go out and buy assets (eventually) the safe-haven need for UK assets is likely to diminish. A bond auction this week from the Bank of England saw the highest yields in a good 6 months for 10yr money; they were still below 2%, where most people would kill to be borrowing, but the trend is definitely there. This does mean that, should data surprise lower and/or there is some form of political upheaval in the coalition, the pound could be once again in the crosshairs.

Latest exchange rates at time of writing

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