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The market has become more doubtful of tapering over the past two weeks, so any tapering move today is likely to see a positive reaction on the dollar, unless accompanied by some offsetting dovish language, says Simon Smith of FxPro. The reactions in currencies are expected to be quite different, as described in the interview below.

Smith also discusses the future moves of central banks in the UK and the euro-zone.

Update:

Simon has over seventeen years experience of macro forecasting and investment strategy research. Prior to joining  FxPro  in May 2010, Simon was a consultant with Thomson Reuters, having spent four years as Chief Economist at Weavering Capital.  He has held economic and strategy positions with Standard & Poor’s, together with consultancy firms 4Cast and MMS International.  Simon holds an MSc. in Economics from the University of London and a BSc. from Brunel University.

  1. With stronger Q2 GDP and consistently low jobless claims, are the chances of QE tapering on September 18th closer?

I think the market has become more doubtful of tapering over the past two weeks, so any tapering move today is likely to see a positive reaction on the dollar, unless accompanied by some offsetting dovish language.   But that appears unlikely. More likely is that we see around USD 15bln reduction in the amount of monthly asset purchases.   This would initially be dollar positive, with the dollar gaining most against the yen, less so against the euro.   The important thing to note is where the labour market has come from since the end of last year and also to consider the increased consequences of continues asset purchases across a range of assets.

  1. Europe has seen some signs of recovery, but German inflation is somewhat subdued. Can the ECB act now?

I’m not sure the ECB is yet in a position where it is seriously considering further policy action. In July, they introduced their version of forward guidance and I think they probably want to see how that impacts monetary conditions going forward. We are still seeing the ECB balance sheet contract as long-term loads are re-paid, so this in itself is leading to a tightening of financial conditions at the margins. It’s a case of seeing if the easy option of forward guidance yields dividends, before undertaking more unconventional measures.

  1. After Carney’s announcement on forward guidance and positive UK data, can we expect a few quiet months from the BOE? What could trigger action from the central bank?

In terms of explicit policy action, it will be quiet, but there will be plenty of debate. The BoE has a lot of convincing to do, both of the validity of forward guidance and of the nuances of the new policy framework and there were hints of this in the latest sets of minutes today. By and large, the market has not bought the forward guidance argument, with the   2 year yield more than 12bp higher to near 0.55% since it was announced (which is a big move in a near zero-rate world).   The coming months is likely to see the Bank subtly sell the policy. If the market believes it, at least partially, then sterling is likely to be vulnerable.

More on tapering:  QE Tapering Preview: 5 Reasons, 6 Scenarios and 7 Potential Currency Reactions