The cone of the Fed is almost a dead certainty — but may not trigger a USD rally again

Economic and political barriers to federal reserve American to reduce its bond purchases are gradually removed making it almost a dead certainty — but do not expect to necessarily stimulate a USD rally, at least not yet.

Apparently, Democrats and Republicans are approaching an agreement on the budget of the United States, which seems likely to avoid a confidence damaging closure of the US Government at the beginning of next year.  On economics before numbers of jobs surprisingly strong American last week and positive revisions to GDP are powerful incentives to start reining in $85 billion the Fed a good month program purchase.

By Justin Pugsley, MahiFX market analyst follow MahiFX on twitter

Taking into account the level of the debate on the cone of the Fed, it is unlikely to come as a surprise to anyone when it begins. In other words the forex markets have largely price inside. The only real question is how much. Taking into account the reservations within the Fed, it will probably relatively small initially, but could be announced as soon as the strategy meeting of 17-18 December.

However, Fed officials may delay the cone for sometime in Q1. Inflation figures remain relatively benign, and they can feel they want more evidence that the economy is improving really not. After all the Fed aims a unemployment rate of 6.5%, it is currently 7%. Low rate - at least 63% - is also a matter of concern. It is at its lowest level since 1978 and has deteriorated. And this has negative consequences for long-term economic growth.

More confidence in EUR/USD

A small cone?

Taking into account these mitigating factors, the Fed's quantitative easing program will be only reduced gradually and may well continue throughout next year. That depends, of course, on the strength of the U.S. economy. No sign of weakness in the economy is likely to see the pause from the Fed the rhythm of the cone.

However, the Outlook for the U.S. dollar also depends on what happens with its trading partners. Japan remains determined to re - inflate its economy with massive stimulus, suggesting that the Outlook for the JPY remains bearish and particularly true if the perceptions of the risk also reduce next year.

For EUR/USD, the picture is more complicated. The European Central Bank has indicated that its monetary policy remains very accommodative in the distant future. He also sees risks the world economy downward - not least cone of the Fed. It is very bearish.

On the other hand, the euro area is to move gradually towards a mechanism for rescue of banks struggling. Yet another factor is that the peripheral economies of the euro area have shown improvements this year and that could be achieved in 2014. These two factors would be bullish for EUR and possibly influence the monetary policy of the ECB.  It also reinforces confidence in the survival of the EUR.

The United Kingdom is closer to the United States in which he has a strengthening of the economy. The Bank of England has become more hawkish. It has already withdrawn a special scheme for mortgage loans. And scored its concern over soaring real estate prices and enough to burst a potential bubble if necessary.

Nevertheless, the Central Bank wants to maintain an accommodative monetary policy to support consumer spending and business investment. As long as markets do not focus on huge deficit from the current United Kingdom - Outlook for GBP/USD remains optimistic.