QE or not QE?

The rally in the markets that has been going on for several weeks is about to meet its next hurdle at 5.30 this evening when the Federal Open Market Committee (FOMC) makes its monthly statement. Speculation that the US will enter a third round of quantitative easing (QE) has been growing for the last fortnight and confirmation has been largely discounted. There is a very good chance that the market could be disappointed. We are very close to a presidential election which is probably the most divisive in a generation. Will the FOMC risk being accused of interference?

The euro has appreciated by almost 6% against the dollar and by more than 3% against both the yen and sterling during the rally, so must be vulnerable to some profit taking. It therefore looks like a good moment for short term buyers of dollars and short term sellers of euro to take some cover. No QE, combined with any backtracking on the part of ECB/Draghi would soon see cable back below 1.60 and GBP/EUR heading back toward 1.28.

In the longer term this writer remains a long term bull of the UK and it was encouraging to read in two admittedly right leaning newspapers that the green shoots are now looking well established. In my travels around the country this year I have been amazed at the pace of regeneration in manufacturing, especially linked to cars and aeroplanes. Added to that, we now appear to be the fashion house of Europe. Assuming my rose tinted spectacles aren’t deluding me I would expect sterling to be considerably stronger by next Easter so longer term operators should use any bout of profit taking to sell dollars.