Tapering worries ease, for now

It seems that we are in another ‘calm before the storm’ moment. Friday’s non-farm payrolls were good, but not so good that they provoked worries about changes in US Federal Reserve policy.

However, with minutes looming on Wednesday the delicate compromise may come to a sudden end. The minutes cover the meeting of 18-19 June, when the Fed caught some on the hop with an unexpected shift towards a more hawkish view of monetary policy. Although the Fed has an official unemployment target of 6.5% for the US economy, it seems they will look to ease off on QE3 before then, with 7% being an interim goal.

Almost all of this is dependent on data; as with all central banks, the Fed is not keen on getting cornered on monetary policy, and prefers to keep its options open as much as possible. New York Fed president William Dudley has already said that tapering is not ‘hard wired’, meaning it is not set in stone. Like us, the Fed can only watch the data and wait.

However, the expectation is that we will now see the first signs of tapering in September, itself an earlier date than the December suggestion which prevailed in the wake of the Fed meeting. If the Fed minutes seem to reinforce this view then fresh weakness in equity markets cannot be ruled out.

The dollar and associated strength drove markets last week, particularly in FX, where the Aussie, euro and sterling all lost ground against their US counterpart. The declines in the latter two have been exacerbated by particularly dovish views from their respective central bankers in the past week, which contrasts sharply with the apparent shift in the direction of tighter monetary policy seen at the Fed.

Wednesday’s minutes are likely to cause increased volatility once more. Having bounced higher last week (taking it well away from 6000), the FTSE 100 has built up a decent head of steam. However, it will need a really dovish statement from the Fed if we are not to see some of these gains slip away.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 79% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money. Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.