It is officially a new era in terms of FOMC’s monetary policy. Or at least that’s what you would think of the USD-reactions immediately after the announcement that the Fed is going to completely remove quantitative easing after adding $1.66 trillion to the bank’s balance sheet.
This announcement was much anticipated, though there was some concern whether global economic weakness and some recently softer US data will delay the complete removal. But Janet and the Fed delivered.
Now the focus is on the forward guidance for the fed’s first interest rate hike in years. Will it be mid-2015? There was really no indication from today’s statement that it won’t. The statement as always balances the positive outlook of the labor market, manufacturing and even housing. But there are still global concerns. I think the Fed needs to get through the winter quarter to have some better outlook for 2015. But for now, it looks like the rate hike is still on schedule, though after that, we might still end up with a “low interest rates for a considerable amount of time” as Yellen pledged.
As I mentioned before, the market reacted to this very dramatically. It is as if it was ready for USD strength but really needed to make sure the Fed will completely get rid of QE. After all, if it didn’t, the interest rate time-line would likely be revised too. So we’re clear for some further USD-strength for now. Let’s take a look at some reactions in USD-majors (EUR/USD, GBP/USD, USD/JPY)
EUR/USD showed initial signs of bearish continuation last week, but rallied ahead of the FOMC event risk. I noted that this rally looked vulnerable, like a flag pattern, and that if the FOMC did what was expected, the USD strength should pull EUR/USD lower. As we can see in the 4H chart, the flag pattern is broken, and price is poised to test the 1.2613 low from last week, with downside risk towards the 1.25 low on the month, and on the year. Now if price pulls back, a bearish market should provide resistance in the 1.27-1.2725 area.
(EUR/USD 4H Chart 10/29; click to enlarge)
GBP/USD was consolidating in October, but has been keeping a bearish bias. However, last week, cable started rallying from 1.5995 and was threatening further bullish correction. However, the FOMC announcement stopped it in its tracks and brought the bearish outlook back to the picture. After a break below 1.5990, GBP/USD is poised to test the 1.5875 low on the month and on the year, with risk of further downside. At this point,, if the market is indeed in a bearish continuation mode, the 1.61-1.6125 area should provide resistance if there is a pullback.
(GBP/USD 4H Chart 10/29; click to enlarge)
The USD/JPY seemed to have anticipated this FOMC announcement. After falling in the first half of October from about 110 to 105.19, it has been rallying in the second half of the month. The 4H chart shows a steady rally, that is now accelerated by the FOMC announcement. If we get a dip, a bullish market should find support in the 108.20 area, and a break below 108.00 might cause problems for the bullish outlook. Otherwise, the outlook remains bullish with the next key resistance at the 2014-highs around 110, and with further upside risk.
(USD/JPY 4H Chart 10/29; click to enlarge)
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