FX Market Summary 12-19-2013: Dollar Responds To Fed Taper

There was no disappointment for volatility hunters following the Fed’s rate decision and policy statement on Wednesday. The FOMC announced a US$10bn reduction in the monthly amount of bond purchases to US$75bn starting in January amid greater optimism surrounding the economic outlook and labour market.

The Fed is also expecting a further reduction in purchases during 2014, but there was a shift in forward guidance with comments that interest rates are unlikely to be increased until unemployment is well beyond the 6.5% threshold. Rosengren dissented from the decision and there were some FOMC concerns surrounding low inflation. After initially dipping lower, EUR/USD turned sharply higher with a move to test the 1.38 resistance area as players bailed out of long dollar positions as an expected surge failed to materialise.

Chairman Bernanke, in what should be his last press conference before handing over to Yellen next year, maintained a more optimistic tone and his remarks helped trigger a fresh u-turn in market direction as EUR/USD retreated sharply to below the key 1.37 support level.

The dollar gained strongly against the yen as USD/JPY broke back above the 103 level and pushed to highs above 104 with further support on dips to just below this level on Thursday. USD/JPY benefitted both from the tapering decision and the fact that equity markets were able to gain ground.

Consolidation was the general theme during Thursday with EUR/USD finding support close to the 1.3650 level with resistance on approach to the former support area around 1.3700. There was a significant reversal for the Swiss franc as EUR/CHF moved back above 1.2250 while USD/CHF held above 0.8950.

The latest US economic data releases did not provide the backdrop further dollar buying. Jobless claims increased to 379,000 in the latest week, contrary to expectations of a sharp retreat, and there were also slightly disappointing readings for existing home sales and the Philly Fed index.

The UK economic data provoked much less of a market reaction on Thursday than 24 hours earlier as the latest retail sales release was in line with expectations at 0.3% from -0.9% previously. After a wild rise overnight, there was some overall disappointment in the data and GBP/USD retreated back to the 1.6350 area as EUR/GBP corrected slightly from very sharp losses seen the previous day.

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