httpvh://www.youtube.com/watch?v=ATOKX7tLgBA

The Federal Reserve continued its ‘wait-and-see’ approach to QE last night as it kept its hand off the lever for one more month. The accompanying statement was cautious with the key phrase being that it “will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”

This suggests to us that the Fed is looking for a further deterioration of economic prospects in the US before it is willing to expand the money supply.

Markets reacted in a disappointing manner to the news with equity markets unsure as to where to head. We think a fall off in equity markets is warranted over the coming weeks. At the moment however we are seeing risky assets have a good 24hrs with EURUSD hitting a 7 week high of 1.3313 as concerns over the European debt crisis eased after some good debt auctions yesterday.

The sales of Greek, Irish and Spanish debt all went well, strengthening the euro and other risky assets. The closest focus was on Ireland’s after the anxiety raised over the swollen debt levels of the country’s banking sector but they still managed to sell EUR1.5bn at a yield of 4.75%. I can’t foresee too much further upside for the euro however; the fundamentals just don’t warrant any further strength.

The pound is weak at the moment however and was hit by poor public finance figures yesterday morning. In a month that is traditionally poor for tax revenues public sector net borrowing hit £15.3bn. The increase was down to an expansion in interest payments on index-linked debt which has risen on the recent high CPI.

Sterling may get hit again today as well as we foresee a fairly dovish set of minutes from the Bank of England. While august’s were fairly balanced you would expect that the most recent woiuld tip a cap towards the recent deterioration in growth and therefore the possibility of further QE.

Other releases to watch out for today include EU industrial production at 10.00, US mortgage applications at 12.00 and EU consumer confidence at 15.00.