Dollar Exchange Rate Forecast Major Losses, Gains Likely For Share Markets If QE Cut

Modified: Tuesday, 17 December 2013 11:47 BST - Written by Toni Johnson

STORY LINK Dollar Exchange Rate Forecast Major Losses, Gains Likely For Share Markets If QE Cut

More strong US data yesterday afternoon has seen institutional investors up their bets on an announcement that the Federal Reserve will be trimming its controversial Quantitative Easing programme tomorrow evening. American Industrial and Manufacturing Production numbers for last month both significantly beat expectations, while October’s counterpart figures were upwardly revised, adding to the upbeat mood surrounding the US economy.

It now appears that US economic activity was not unduly harmed by the partial government shutdown which marred the first half of October. If the Fed’s policy committee takes this view and decides to honour Chairman Ben Bernanke’s promise of earlier this year to begin tapering before 2013 is out, then there could be major market movement in the global currency markets this side of Christmas.

Looking ahead to today’s session, this afternoon’s US inflation numbers will give investors further clues on the Fed’s likely policy path in the short to medium term. The key Consumer Price Index inflation data is released at 1330hrs in the States. Anything north of the anticipated 1.3% will support the Greenback and hit the Australian, New Zealand and Canadian Dollars hard.

Elsewhere, yesterday’s session also saw a spike in the level of the $VIX index, (sometimes referred to as the ‘Fear Gauge’ by analysts). The measure of the number of protective ‘put’ options placed with equity trades on the Chicago Mercantile share exchange, reached its highest level since the middle part of October on the day. The sharp move higher suggests that market participants fear the worst for tomorrow’s US central bank decision. A cut to QE will be likely to see global share markets haemorrhage support, while the US Dollar registers major gains.

With the Pound Sterling suffering a generalised lack of support in recent sessions, a ‘yes’ vote to cutting QE from the Fed is highly likely to see GBP USD plunge back into the 1.5000s in short order.

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