There was a surprise decision by the Federal Reserve in the latest FOMC policy statement on Wednesday with no tapering as bond purchases were maintained as US$85bn per month. The heart of the Fed statement was that the labour market had not strengthened sufficiently to justify a slowing of bond purchases. There was unease surrounding the tightening of financial conditions and the risk that inflation stayed too low in the medium term.
Fed Chairman Bernanke’s press conference did not have a major impact as, although he stated that stimulus could still be withdrawn later this year if economic conditions justified such a move, the underlying tone was resolutely dovish.
Given that markets were positioned for a modest tapering, there was a sharp decline in Treasury bond yields with the benchmark yield declining to near 2.70% from a recent peak at 3.00%. In this environment, there was also a sharp decline in the dollar as EUR/USD pushed to highs above 1.35.
Underlying dollar sentiment remained weak given the Fed’s very dovish tone with some speculation that there would be no tapering this year as uncertainty remained extremely high. EUR/USD maintained a strong tone on Thursday with a peak in the 1.3570 area before a modest correction on profit taking and move away from over-bought conditions.
The US jobless claims data was again stronger than expected at 309,000 in the latest week from a revised 294,000 previously. The US currency rallied briefly, but remained firmly on the defensive against the Euro.
Another prime effect of Fed inaction was a sharp improvement in risk appetite. Global stock markets rallied and there was also a major easing of short-term emerging-market stresses. These two factors combined had an important impact in undermining the yen. After an initial slide to below the 98 level, USD/JPY rallied to move above the 99 level, moving further ahead following the jobless claims data, while EUR/JPY moved to three-year highs above 134.50.
After a sustained run of better than expected economic data, the run finally ended for Sterling with a larger than expected decline in retail sales of 0.9% for August following a 1.1% gain the previous month. GBP/USD dipped sharply to around 1.6070 from 1.6125 after the data, but still carved out substantial gains over the past 24 hours while EUR/GBP rallied to the 0.8440 area.
The Swiss National Bank held policy unchanged at the latest policy meeting and the Euro 1.20 minimum level also stayed in place with USD/CHF nursing heavy losses around 0.91.