Pound to Dollar Exchange Rate Could Tumble If Federal Reserve FOMC Fails To Announce QE3

Modified: Thursday, 13 September 2012 09:03 BST - Written by David Woodsmith

STORY LINK Pound to Dollar Exchange Rate Could Tumble If Federal Reserve FOMC Fails To Announce QE3

It’s Thursday September 13th. It’s Federal Reserve FOMC decision day - and that means one thing for the currency markets – pronounced price action. The US central bank’s policy committee has been in purdah for almost 48hrs now. At 16:30hrs BST, Fed Chairman Ben Bernanke will announce the fruits of their deliberations when he reveals whether America is set for a third bout of Quantitative Easing. The US Dollar has come under severe selling pressure since Bernanke’s s Jackson Hole speech of almost two weeks ago, which contained words of praise for ‘nonconventional’ policy measures including the Fed’s current asset purchase scheme. Investors took this as a tacit pre-announcement that the Fed will be embarking on QE3 sooner rather than later and the move against the Buck ensued.

However, there remains a distinct possibility that market participants are reading too much into Bernanke’s words. A US Presidential election looms in the States, and the Fed may be unwilling to pre-decide the future administration’s monetary policy for them, particularly given the fact that Republican Candidate Mitt Romney’s advisers have openly questioned the veracity of QE in recent weeks. With several options other than QE open to them, including an extension to ‘Operation Twist’ which involves the lengthening of the term of corporate debts, or an alteration to US interest rates, QE3 remains far from the racing certainty which many investors presume it to be. Indeed, a poll-of-polls conducted yesterday found that only 40% of analysts believed that there would be more QE announced today. This set-up means that the GBP USD exchange rate is riding for a fall. If the Fed fails to announce more QE later today, then expect Cable to be trading back below the 1.6000 level within an instant.

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