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The Fed taper is a now only a matter of time, but will it boost the dollar?

The economic and political hurdles to the US Federal Reserve to taper their bond purchases are steadily being removed so that it is almost a dead certainty Ė but donít expect it to necessarily spur a USD rally, at the very least not yet.

It appears Democrats and Republicans are closing in on a deal over the US funds, which looks likely to stay clear of a confidence damaging shut-down of the federal government early next year. On the economic front the surprisingly strong US jobs numbers the other day and positive revisions to GDP are powerful incentives to get started reining in the Fedís $85 billion a month bond purchasing programme.

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Given the level of debate over the Fedís taper it truly is unlikely to come as much of a surprise to anyone when it actually begins. In various other words the forex markets possess largely priced it in. The sole question will be by the amount. Given some reservations within the Fed it might be relatively small initially, but could be announced since the December 17-18 policy getting together with.

However, Fed officials may hold up the taper to sometime throughout Q1. Inflation numbers remain relatively benign plus they may feel that they want more evidence which the economy really is improving. All things considered the Fed is targeting an unemployment rate of 6. 5%, itís at the moment 7%. The low labour participation charge Ė at under 63% Ė is also a concern. Itís at its lowest since 1978 and contains been deteriorating. And this features negative implications for long-tern economical growth.


Given these mitigating factors the Fedís quantitative easing programme may well continue throughout next year all of which will only be reduced very progressively. That will of course depend on the effectiveness of the US economy. Any signs of economic weakness will likely see the Fed pause the pace on the taper.

However, the outlook to the USD also depends on whatís happening having its trading partners. Japan remains committed to re-inflating its economy through enormous stimulus measures, suggesting the outlook for JPY remains bearish as well as particularly so if perceptions of risk also diminish next season.

For EUR/USD the picture is more complicated. The European Central Bank features signalled that its monetary policy will continue to be very accommodative far into the future. It also sees downside risks to the world economy Ė not least on the Fedís taper. Thatís all bearish.

On the other hand, the Eurozone is inching to a mechanism for rescuing striving banks. Yet another factor is that peripheral Eurozone economies have demostrated improvements this year and that is followed through into 2014. These two factors would be bullish with regard to EUR and would eventually sway the ECBís monetary policy. It also boosts confidence in the survival on the EUR.

The UK is nearer to the US in that it's a strengthening economy. The Bank of England is becoming increasingly hawkish. It has already withdrawn an exclusive support scheme for mortgages. And has flagged its concerns over soaring real-estate prices and stands by to help pop any potential bubble in the event needed.

Nonetheless, the central bank wishes to maintain an accommodative monetary policy to aid consumer spending and business investment decision. For as long as the markets usually are not focussing on the UKís large current account deficit Ė the outlook for GBP/USD remains bullish.

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