A surprise from the Fed's James Bullard

Following the resumption of improved US economic data yesterday with US Initial Jobless Claims falling to their lowest level in over 15 years, and Industrial Production climbing 1% in September, it was appearing that some of the stormy weather the financial markets had experienced over the previous week was calming down. Yes, futures were still moving slightly lower but that was excusable bearing in mind the continual headlines and uncertainty over the global economic outlook. However, there were signs on the currency markets of the USD rebalancing itself and moving higher against its counterparts following the unexpected sell-off on Wednesday.

This all changed though and the USD moved lower when Federal Reserve official James Bullard dropped quite the surprise by suggesting the Fed should consider delaying the conclusion of QE later this month and continue purchasing securities to prevent a decline in expected inflation levels. During an interview in Washington, Bullard expressed that “the taper was data dependent” and “we are watching and we’re ready and willing to do things to defend our inflation target”. The recent FOMC Minutes release suggested that the higher valued USD was causing concern among the Federal Reserve that inflation targets might be at risk.

The main underlying issue behind Mr Bullard’s comments yesterday was that previously he was publically seen as a hawk who also had the ability to encourage the USD bulls to charge forward. By having supposedly the most hawkish member of the Federal Reserve question the conclusion of QE, you must wonder what the mindset of other members of the Federal Reserve is right now.

Following Bullard’s comments, US stocks progressed to erase some of the previous losses and the Eurodollar went from trading around the low 1.27s to concluding Thursday at 1.2808. With the EURUSD recovering losses, the USDCHF pulled back from as high as 0.9549 to moving as low as 0.9360. The Cable also appreciated and transitioned from 1.5874 to conclude trading at 1.6086.

The European economic calendar is light today and it wouldn’t surprise me in particular if the GBPUSD showed signs of erasing gains. It was announced earlier in the week that UK inflation during September fell to its lowest level in five years (1.2%) and in collaboration with Average Wage Growth only increasing by 0.7%, there is no real pressure on the Bank of England (BoE) to raise rates. Therefore, investor attraction for the GBP is limited.

Prior to the US opening bell this afternoon, Janet Yellen is scheduled to speak in Boston. After the complete rollercoaster the financial markets has experienced over the past week, it wouldn’t surprise if investors hang onto each word the Federal Reserve Chair has to say. We know from the past that Yellen is an advocate of QE and any signals later today that QE round 4 is a possibility for the future, or that round 3 might be delayed has serious potential to halt demand for the Greenback.