Thursday, October 31, 2013

The Forex market has taken a dollar positive view of yesterday's FOMC statement - for now at least

The Federal Open Market Committee (FOMC) statement yesterday was interpreted, on balance, as painting a picture of the US economy as one that is on the road to recovery. This means that tapering, or an end to Quantitative Easing, is now seen as being closer in time than was previously the case.

During his press conference after the Fed meeting on 18th September, Mr. Bernanke signalled that the then upcoming debt ceiling debate and possible government shutdown was a concern for the committee. It was represented as one of the major factors in deciding to make the surprise announcement that tapering was being postponed. Now it seems that the debt ceiling debate has faded as an issue. There was no mention of it at all in yesterday’s release.

The next major item on the radar for Fed watchers is the October Non-Farm payroll report, which is itself delayed until November 8th, having been originally scheduled for tomorrow, November 1st. Normally, a low figure, below 150,000 new jobs, would have the effect of weakening the US dollar. On this occasion, a relatively low figure has the potential to be explained away as a one-off because of the government shutdown, while any larger number will gain additional significance precisely because it will be seen to have occurred in spite of the fact that so many Federal offices were closed in early October, and the uncertainty this caused might have impacted on private sector employment.

For all these reasons we are tending to be bullish on the US dollar in the weeks ahead. Gold, in particular, took another hit after the FOMC statement was released yesterday. The Euro seems to be on the turn, the USDJPY pair is indicating a climb out of the tip of the pennant we highlighted yesterday and the Aussie continues the retreat that started when the Reserve Bank of Australia (RBA) let it be known that, in their estimation, its value was too high to be good for the Australian economy.

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