Pound Strengthens on Scottish Vote
Moves in the FX market have been increasingly volatile in recent weeks, and this was no exception. Some may have been expecting a sharper move in the Pound given the importance of the announcement, however the nature of an all-day vote meant that the currency was subjected to episodic volatility as the votes were updated but no major surprise as it gradually become clear the No votes had the victory; Scotland is set to remain in the United Kingdom for now. Despite a shock result, the Pound managed a respectable range of 350 pips this week with GBPJPY and GBPAUD both exceeding 500 pips in the lead-up to the vote.
While the result helped regain some strength for the pound, longer term the close result does provide some cause for concern. Votes are still being tallied, however the final vote is looking likely to fall around the 55%/45% mark in favour of No – a fairly even contest and indicative of future interest in another referendum. The pound sits at around 1.6450 at the time of writing.
The ECB allotment was surprisingly low compared to analyst forecasts, but failed to generate much heavy trading. Economists had expected an uptake of between 100 and 300 Billion Euros for the first T-LTRO program, however the program only generated interest of 82.6 Billion. The Euro did not react much on the announcement, drifting lower by a quarter of a cent before finishing the day around half a cent higher against the US dollar. The uptake means that the next program in December will need a very strong subscription in order for the ECB to offset its shrinking balance sheet. The two new T-LTRO’s must offset the previous LTRO’s which are maturing in January and February 2015.
The FOMC Statement and press conference caused strong demand for the US Dollar. The Statement itself was not overly hawkish, thought the new dissenting voice of Richard Fisher:
“President Fisher believed that the continued strengthening of the real economy, improved outlook for labour utilization and for general price stability, and continued signs of financial market excess, will likely warrant an earlier reduction in monetary accommodation than is suggested by the Committee’s stated forward guidance.”
While the Fed kept it’s wording:
“… that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends…”
There was some speculation that this would be altered to reflect the next step in tightening after Quantitative Easing ends. What was confirmed, however, is that QE is on track to end next month with the Fed choosing to reinvest maturing securities until after the first rate rise occurs. This means that while the Fed’s balance sheet will no longer grow it will stay roughly constant in nominal terms until the Fed begins its rate tightening cycle. After this point the Fed is likely to simply allow its security holdings to mature and will remit the profits to the US Treasury. The move was felt strongly in all US Dollar pairs, with EURUSD falling over 125 pips and USDJPY rising around 150 pips.
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