FOREX TRADING

FOMC: Less Dovish, but Hikes Remain Distant

• No change to policy measures. Hoenig repeats his lone dissent.
• Growth language slightly more optimistic but no change to inflation outlook
• ‘Extended period’ retained indicating continued commitment to low rates
• Further asset purchases highly unlikely
• No change to our outlook expecting unchanged rates until late this year

Details

The assessment of activity was slightly more upbeat than in the previous statement. As expected the FOMC turned more optimistic on the labour market while on the other hand noting recent very weak housing data. Generally, the committee still expects a moderate recovery including a gradual return to higher resource utilisation. As a result, the outlook remains 3-3.5% growth, a relatively moderate rate historically.

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December 15-16 FOMC Minutes Highlight Risks that Securitization Markets are “Still Substantially Impaired”

The minutes of the December 15/16 meeting suggested that most members saw recent economic data as consistent “moderate growth and subdued inflation in 2010.” As a result, the Fed saw little reason to change either the target range for Fed funds of 0 to ¼ percent or the large-scale asset purchase programs. This outlook also provided no reason to alter the central bank’s assessment that these exceptionally low interest rates would continue to be warranted “for an extended period.”

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Dollar Falls As Fed Keeps Loose Monetary Stance

The dollar fell on Wednesday as the Federal Open Market Committee reiterated that US economic conditions ‘are likely to warrant exceptionally low levels of the federal funds rate for an extended period.’ The FOMC also said inflationary expectations are well anchored and consumer spending is improving. Bond yields and commodity prices rose following the Fed statement, but US stocks pared strong gains at the close and the S&P 500 closed just 1.09 points higher at 1,046.50. The yen fell for a third consecutive day. The euro, supported by improved risk sentiment, rallied after finding support at the 1.47 handle. Sterling rose on strong UK consumer confidence and services PMI data. The Australian and Canadian dollars gained as commodity prices advanced and gold made a new record high.

The dollar index fell as risk appetite increased. Negatively correlated with the equity market, the dollar index fell as stocks rose. The dollar index’ long-term downtrend was broken last week. The 76-area support was broken today as the Fed promised to keep its highly accommodative monetary stance. The Fed’s stance makes it difficult to see any upside on the dollar; still, shorting dollar is a crowded trade, so there could be sharp short covering rallies. There are support at the 75-handle and resistance in the 77-78 area.

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On yesterday’s trading, the Yen kept going to be the dominant currency in the forex market. When almost of the major currencies attended fluctuate without marking a sustained trend, the JPY strengthened on all fronts, and currently looks to be this week’s top investment. On today’s trading, the most fascinating data will come at 18:15 GMT, as the Federal Funds Rate for August will be announced. The main question is whether the Fed will hike rates in light of recent positive economic data. Such a turn of events could create mayhem in the market, and traders are advised to be prepared. (more…)