The FOMC decided to keep interest rates at the current buffer level of 0% -- 0.25% as expected yesterday while initiating a elongated halt on its Treasury purchases or quantitative easing in our parlance.

There will be no extra cash above the $300bn however the time scale in which these dollars are due to be spent has been extended out until mid October. This can be viewed as a medium term dollar positive as the monetary / fiscal policy landscape is being returned to some semblance of normality. Overnight however the riskier assets of this world have enjoyed themselves as the Fed’s comments of improvements in short term indicators has increased risk seeking trades.

In the other piece of central bank news yesterday Mervyn King delivered the Bank of England’s Inflation Report with a much more dovish and laissez faire attitude than most predicted. The recovery in the UK is seen to be much more muted than certainly the chancellor’s predictions and the inflation picture will likely remain suppressed even with the injection of £175bn through QE. I would expect that we would see the first interest rate hike in Feb/Mar time next year.

The pound however will be volatile until then. The recovery that sterling made against the dollar and euro was going swimmingly until the clod-hopping boot of QE knocked it down a couple of pegs. The recent trade data showed that while exports are still under pressure given the global nature of this downturn the imports side of things is really getting hit, aided and abetted by the weaker pound. The Swiss have jumped into the market to weaken the Franc and have been fairly open about it. Is the UK’s recovery going to be powered by an undervalued pound?

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