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Tapering announced in US

Tapering announced in US

At yesterday’s Federal Open Market Committee monthly policy meeting the decision was taken to reduce the level of quantitative easing (amount of additional USD released into system via the purchase of bonds) from 85bn to 75bn.

The Federal Open Market Committee (FOMC) unexpectedly announced a tapering of asset purchases late yesterday. Beginning January 2014, the level of quantitative easing (amount of additional USD real eased into system via the purchase of bonds) from 85bn to 75bn per month.

Supply and demand would suggest that this reduction in the supply of USD should strengthen/increase the price USD and cause a fall in GBP/USD.

However the decision by the FOMC is a big vote of confidence in the recovery of the world’s largest economy and thus the global economy. As such this encourages a risk-on scenario and removes a lot of uncertainty in the market. This leads to the selling of safe haven currencies such as USD and investment in others.

So we have two competing factors on the price of USD. So far they seem to be fairly evenly balanced with GBP/USD relatively unchanged since yesterday’s London close.

Yesterday saw very positive news from the UK in the form of a fall in unemployment, the biggest fall in a decade in fact. Given that the BoE has targetted 7% unemployment as a figure at which they may consider an interest rate rise this has given GBP a big boost across the board.

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