EUR/USD Traders Surprised by FOMC

By FX Empire Analyst - Barry Norman
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Asian markets followed US market in response to yesterday’s Fed action.  Sentiment on risk remains ‘risk-on’. The trade-weighted dollar is nearing the 79.00 level and EUR/USD marching north of 1.30.

In the lead up to yesterday release, it was all counting down to the Fed policy decision and that was also the name of the game for EUR/USD trading. Early in Europe, the pair changed hands in the low 1.29 area. The top at 1.2937 was not that far away but there was also no appetite to push the pair beyond this barrier. During morning trade investors turned also a bit more cautious on risk even as the Italian bond auction went very well. In technical trade, EUR/USD drifted slightly lower. Still this was negligible given the recent gains. EUR/USD changed hands in the 1.29 area around noon.

The US PPI was slightly higher than expected, but the claims disappointed. As expected, the market didn’t feel invited to react just hours ahead of the Fed meeting.

Upon publication of the Fed statement in the mid afternoon investors apparently had no clear insight on the whole package of measures and on its potential impact. There was some hesitation whether the new measures would be enough to support growth and employment in a meaningful way. So, EUR/USD spiked up and down in a rather broad range around the 1.29 big figure.

Some investors apparently even prepared for some kind of ‘buy-the-rumor, sell-the-fact ‘reaction. However, a second reading of the Fed communiqué made clear that the Fed had activated the ‘Big bazooka’ and that it was even prepared to do more if necessary.

Investors realized that was plenty of inks in the printing press and that even more cartridges were in store. A new wave of USD selling kicked and EUR/USD regained the 1.30 mark when Bernanke started his press conference. During the press conference Bernanke made clear that the Fed had the intention to maintain a very aggressive approach for a very long time, even if economic activity would start to improve at some point. The message was loud and clear.

Keep a look at the reaction of gold!

EUR/USD closed the session at 1.2991, compared to 1.2900 on Wednesday.

Today markets will return to some normalcy, the EMU CPI will be published, but don’t expect this to be a big issue for EUR/USD trading. In the US, we get a first set of post-FOMC eco data, with the CPI, the retail sales, industrial production and Michigan consumer confidence. After yesterday’s Fed statement, we would be surprised that markets would react to a higher than expected inflation figure. For the retail sales (headline) and the Michigan consumer confidence we put the risks for a (slightly) better than expected figure. Keep a very close eye on the market reaction. It is not that evident to see the new reaction function of markets in general and of EUR/USD in particular in the post-QE-3 era. For now we assume that the usual risk-on/risk-off reaction will still be in place, but remain attentive for other market behavior. At some point, there will be a correction on the recent dollar sell-off. However, given the strong commitment of the Fed, we don’t feel the need to front-run on such a move. During the day the focus will turn to Europe as the Finance Ministers of both the EMU and EU will meet in Cyprus. There will a press conference later today. This kind of political meeting on the EMU debt crisis always contains an event risk. Of late, one couldn’t make money to bet on a negative outcome in case EMU event risk. This might also change over time, but also from this euro point of view, don’t row against the trend until we see that the market is ready to change its reaction pattern. For now we don’t see that trigger. So, we continue to join the trend.

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