The Fed’s Disappoint and Do Nothing

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In a nutshell, Chairman Bernanke and associates today downgraded their view on the economy but otherwise didn’t make any changes to its key interest rate, low-rate pledge, or asset-buying plans. The FOMC now says “economic activity decelerated somewhat over the first half of the year,” vs. a prior description of saying the “economy has been expanding moderately.” The decision not to extend its low-rate pledge beyond the current “late 2014″ was unexpected. The Fed kept its federal funds rate target between 0% and 0.25% and said it “will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.” This was the bare minimum that the markets were expecting, leaving open anticipation for stimulus in September. Overall markets were disappointed.

Within seconds of the statement, the euro began to tumble and is now trading at 1.2263 falling from over 1.23 prior to the release. Gold tumbled below the 1600 level and is trading at 1593, at this time and the GBP/USD dropped like a lead balloon trading at 1.5564 prior to the release the pound was at 1.5636.

The USD index soared to trade at 83.06 while the USD/JPY saw a radical turn around as the USD moved up to trade at 78.40.

Traders have now turned their focus on tomorrows ECB big guns as promised by ECB Chairman Draghi. This event will be preceded by the BoE decision, where traders are hoping for some additional asset purchases and a rate decrease, but the overall view is that the BoE will hold to its guns and keep everything on hold, ignoring the drop in GDP and the words of warning from the IMF.

Traders will now hold out until the September 13th meeting, which bookies were already giving the odds at 65% today, that the Feds would hold out til the September meeting to offer any stimulus.

That said, there isn’t much else to say, as Mr.Bernanke, did not say much new, but his disappointing view of the economy was unnerving and worrisome. We may see markets return to risk aversion mode.

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About: FX Empire Analyst - Barry Norman

Barry produces a private Daily Market Review newsletter that is distributed around the globe to over 25,000 subscribers and recently published a book on Options Trading that is available from amazon.com

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