Fed Minutes Cause Whiplash In EUR/USD

Currencies Direct January 26th 2012 - 2 minute read

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. Report
by Alistair Cotton

Written by
Currencies Direct

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