Hawkish Federal Reserve Officials Calling For The End Of Quantitative Easing In 2013
(US) Fed’s Plosser (hawk, non-voter): Forecasts GDP in 2013 and 2014 at 3%
(US) Fed’s Lacker: Fed’s real goal for inflation is 2%, markets do sometimes overshoot and that could be a possibility in the long term debt market
(US) Fed’s Bullard (hawkish, FOMC voter in 2013): Employment report shows its ‘steady as she goes’; economy growing at 2% or slightly more
How to interpret these headlines?
With all three Fed officials calling for the potential end of Quantitative Easing (QE3 and QE4) and the fact that Bernanke and other doves have not responded, it is increasingly likely that the market may be repositioning itself for a USD breakout. Although the reality may be different from market perception, I do believe that because of this “unexpected twist of events”, USD will continue to remain in demand, until there are reasons (such as other Fed Officials comments) for the market to act otherwise.
Of course, judging from the intensity of sell offs in European currencies, we are likely to see some consolidations; but facts remain unchanged that if the Feds were to end QE this year, the next step would be to raise interest rate, and that would come as early as 2014, or a whole 12 ~ 16 months earlier than the previous FOMC Statement (the statement before the Committee changed to threshholds based targets), where the Committee was still calling for “exceptionally low rates until mid 2015″.
This may very well be another “turning point” in the Forex market, I’d definitely recommend to use caution when selling USD, as the trend may have changed. My recommendation is to SELL JPY, CHF, and CAD against USD, as the outlook for EUR, GBP, AUD, and NZD may be affected by risk sentiments and/or central bank actions.