Modest expectations surrounding the Fed impact was confounded by aggressive price action following Wednesday’s policy statement and again during Yellen’s press conference.
There were no surprises surrounding the actual decision as the Fed announced a further US$10bn tapering of bond purchases to US$55bn. On their current assessment of the economy’s likely trajectory, the Fed is also expecting to complete the tapering process this year, most likely during the fourth quarter. There was an important change in forward guidance with a dropping of numerical thresholds such as an unemployment rate of 6.5% with a reversion to a more traditional method of analysing of a wide range of variables.
There was a shift in Fed forecasts with lower unemployment rate estimates and more members expecting the first increase in short-term interest rates to be in 2015 rather than 2016. Yellen also suggested that the first rate increase could be around six months after tapering is concluded with expectations of a Fed funds rate of 1% by the end of 2015.
Capital markets reacted aggressively to the forecasts and Yellen’s rhetoric with a sharp increase in US Treasury bond yields to above 2.75% which also provided strong dollar support as it initially moved to a two-week high on a trade-weighted basis.
EUR/USD was subjected to strong selling pressure with a retreat to near 1.3810. There was partial relief during the Asian session Thursday, but the pair was unable to regain 1.3850 and there was fresh selling pressure in Europe with a break blow 1.3800 leading to increased selling and lows just above 1.3750.
The Swiss National Bank left monetary policy and the Euro minimum level unchanged. The bank was optimistic that it would not have to intervene to weaken the currency and USD/CHF continued the strong move seen Wednesday with highs near 0.8870.
After failing to draw any major support from set-piece events on Wednesday, Sterling was influenced primarily by wider dollar gains and with much less confidence surrounding UK out-performance in yield terms. GBP/USD retreated to test support below 1.6500 early in New York with lows at 1.6480.
The US jobless claims data was slightly better than expected at 320,000 in the latest reporting week from 315,000 previously which helped maintain the mood of optimism surrounding the US outlook while there was also a stronger than expected reading for the Philadelphia Fed index. EUR/USD remained trapped near daily lows following the data, although there was solid buying support at the 1.3750 area. USD/JPY was unable to regain 102.50 as emerging-market caution prevailed.