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Forex Flash: US economy approaching escape velocity? – UBS

FXstreet.com (Barcelona) - The Federal Reserve's decision this week did not yield any substantial changes in policy. Although some will interpret this as providing unnecessary stimulus while ignoring economic realities, the Fed is simply redefining (or 'flexibility interpreting') the various definitions of policy tightening: as long as GDP growth is faster than balance growth, conditions are indeed tighter.

This position can be criticized, however the fact that the Fed can already assert one definition where tightening is actually happening and able to keep this trajectory, means it is already quite far along the curve in policy. “This is perhaps the best reflection of the US economy itself approaching 'escape velocity'.” writes Research Analyst Gareth Berry at UBS.

As for the BoE, it is a different matter. If the Fed's balance sheet is expanding faster, then on a relative basis the dollar should be 'debased' more (i.e. more printing) and the GBP/USD should be going up. The ratio had actually been falling sharply for most of last year until QE3, and just at a time when the BoE chose to temporarily end QE as their focus shifted to credit allocation rather than supply. According to Berry, “Price action in the GBP/USD through most of 2012, however, did not really reflect the fact that while Operation Twist was ongoing and US growth was already starting to outperform, the currency pair did not factor in policy differentials.”

Fundamental Afternoon Wrap: EUR making a bottom?

This afternoons institutional research sees focus continue on EUR, with Cypriot developments having to make space for poor German and French PMI numbers this morning. There is a feeling that with the failure to break much lower in EUR/USD over recent days, much of the bank news may be priced in and a bottom may be forming.
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Cyprus government proposes setting up investment fund to secure bailout

After long talks the government in Nicosia has decided to create an “Investment Solidarity Fund" on Thursday afternoon in order to be able to strike a deal on the rescue program with the Eurozone and the IMF before the ECB withdraws liquidity to the Cypriot banking sector on Monday. The investment fund would be backed by various state assets such as church property or revenues from the country's natural gas reserves.
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