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The Fed has been saying for several months that it will begin to reduce its stimulus towards the end of the year as long as data continues to show the economy is growing in line with Fed forecasts.
The market has been expecting such a taper to be introduced at the September FOMC meeting for a few months also, but with last Friday’s employment situation for August report failing to meet forecasts and now August’s retails sales data also missing expectations today, the evidence is starting to stack up that the economy is muddling along at a worryingly low pace of growth.
Retail sales increased just 0.2% in August, the slowest pace in four months, and below forecasts which had pointed to a 0.5% gain.
The consensus remains that the Fed will initiate tapering next week, but expectations about the magnitude of the reduction are having to be modified, with speculation now growing that the Fed will only scale back by a token amount.
As quantitative easing should in the long term act to debase a currency, expectations of a September taper have been benefitting the dollar in recent months. The lowering of these expectations has consequently hindered the dollar today. By mid-afternoon in New York, GBP/USD was up 0.46% at 1.5877, while USD/JPY was down 0.28% at 99.26.