Fed disappoints before Draghi takes the stage

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For those market participants expecting some form of movement from the Federal Reserve last night, it was as disappointing as the Australian showing in the Olympic swimming pool. The FOMC said that it will be keeping interest rates low until late 2014 and that “The committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery”. This translates to an intention to move if the situation worsens in the future by launching another round of quantitative easing but, the committee does not view the current situation as bad enough yet.

The reaction has been fairly muted overnight given what’s coming over the horizon today with the ECB meeting. Only a week ago we heard from Mario Draghi that “within our mandate the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” The market has taken this as an explicit warning that looser monetary policy is on its way with a risk rally that, although not a stratospheric one, has seen some shorts have to cover in expectation that the roof could get blown off.

Some expectations were quashed yesterday as the Bundesbank got political by releasing comments by its leader Jens Weidmann that boiled down to “we are the largest and most important central bank in the Euro system and we have a greater say than many other central banks in the Euro system”. The fact that these comments were made before Draghi’s does limit their impact somewhat but the timing of the release shows that the Bundesbank will not go down without a fight.

The options for the ECB are not limited in the grand sense but are by what people, mainly the Germans, will vote for. The granting of a banking license to the ESM would allow the direct buying of periphery debt with ECB funds, something that is legally verboten at the moment. This remains our favourite plan instead of a reintroduction of the SMP to buy debt on the secondary market (allowing banks all kind of carry trade benefits) and another LTRO.

Expectations therefore are of some change in language from Draghi in his press conference this afternoon but, if anything is seen as rowing back last week’s missive then the collapse in risk could be quite something.

We also have the Bank of England meeting today, but following the expansion of QE at last month’s meeting, anything but a hold in both rates and QE would be a real surprise.

Yesterday’s data was once again poor confirming that the malaise in Q2 has continued into Q3. Only the Irish manufacturing PMI showed expansion in Europe yesterday while the UK’s number was the worst since May 2009. The US ISM number also showed weakness, backing up the Fed’s plans to be there if needs be.

Indicative Rates Sell Buy
GBPEUR 1.2719 1.2738
GBPUSD 1.5674 1.5685
EURUSD 1.2313 1.2333
GBPJPY 122.50 122.69
GBPAUD 1.4888 1.4915
GBPNZD 1.9271 1.9300
GBPCAD 1.5690 1.5719
NZDUSD 0.8124 0.8144
GBPZAR 12.88 12.93
USDZAR 8.2095 8.2529
GBPPLN 5.2282 5.2560
EURJPY 96.19 96.39

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Fed disappoints before Draghi takes the stage

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