Fed minutes cause whiplash in EUR/USD

Currencies Direct January 26th 2012 - 2 minute read

The Federal Reserve minutes from the meeting earlier this month were released yesterday evening and after several months of treading water the Fed decided to change its wording on interest rates. The Fed now plans to keep rates at extraordinary low levels until the end of 2014, which is a year further than their previous stance and signals to the markets that the Fed will continue to provide a huge amount of monetary support even as the economy is recovering. The consensus was that the Fed would begin to withdraw support once they thought the economic recovery had gained traction but yesterday’s announcement has realigned the market view to expect low interest rates for a long time to come. The immediate reaction in the markets was positive with stock markets rising and a large move in the EUR/USD pair from 1.29 to over 1.31, which given the size of the move we can expect slight retrace back towards the 1.30 level during today.

The UK economy contracted by 0.2% in the previous quarter, which was slightly more than the consensus estimate of -0.1% but not large enough to overly worry the markets given than ONS regularly adjusts initial GBP readings by over 0.1%. In the lead up to the announcement Sterling was sold off across the board quite heavily but once the data was announced we saw a broad recovery in Sterling throughout yesterday. The Bank of England minutes gave no more clues about when further QE might be launched, the Governor did a good job in the proceeding days to forewarn the market that QE is still on the table without specifying exactly when it might start.

Positive German business climate data was the main driver of the currency markets yesterday morning but the rally ran out of steam once the US opened and focus turned to the impending release of the Fed minutes. We do have a large amount of EU data due today, along with the key US durable goods orders later this afternoon.

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