Members login
Fed Does Excellent Job of Managing Market Expectations
Written by article default Wednesday, 22 September 2010 05:53
Overall, we think that the Fed did an excellent job of managing investor expectations on Tuesday, after issuing a statement which indeed did ramp up its language to signal a readiness to implement yet another round of accommodation, while at the same time effectively leaving monetary policy unchanged. It is clear that while there is a very strong and near certain possibility that another round of accommodation will be implemented in the event of continued weakness within local data, it is also equally clear (although the markets don’t seem to be paying as much attention to this) that should data pick up and come in at or near expectation over the coming weeks, then the Fed will not need to move to more accommodation and instead will be quite comfortable leaving policy as is.How does this all translate into direction in the currency markets? For now, we see the short-term risks to the downside in the USD, with the change in the monetary policy statement certainly having a negative impact on US yields and widening differentials back in favor of currencies. The key level to watch above comes in by 1.3335 in the Euro, with a break to open a fresh upside extension back towards the 50% fib retracement off of the 1.5000-1.2000 move, which comes in by 1.3500. However, longer-term, we see a scenario where the buck stands to benefit no matter what the market environment.
Should risk sentiment deteriorate more dramatically, then the recovery structure in the global macro economy will be called into question and most probably result in a massive flight to safety back in favor of the USD. On the other hand, should risk sentiment improve and solidify the prospects for a sustained global recovery, the Fed will be in a position to reverse its monetary policy and begin to raise rates. This should benefit the buck on a relative value basis, with yield differential narrowing back in favor of the greenback given that the Fed will need to move rates up that much faster than other major economies.
Looking ahead, the Bank of England Minutes are slated for release at 8:30GMT, with Eurozone industrial production (-1.4% expected) following shortly after at 9:00GMT. US equity futures are currently pointing to a firmer open, while oil is bid and gold trades to fresh record highs just shy of $1300.
Click here to learn more about DailyFX.