Ben Bernanke prints more dollars as expected from early hints. The methods that the central bank will now use, and the worries about the slowdown, end the dollar’s round trip, and makes the break down of EUR USD a false break – at least for now.
In my post about scenarios for the Fed decision, the scenario about the dollar sliding down had the highest probability. Indeed, this scenario was realized, as the Fed announced fresh dollar printing – and the result is as expected. While the headline was as expected and the result as well, the details are interesting:
Update: The trend has reversed – the Federal Reserve’s move triggered deep fears of a global economic slowdown. The risk factor is back in the game. Big time. The “safe haven” dollar and yen are now on the move, EUR/USD, GBP/USD and other “risky” currencies are falling.
The Federal Reserve announced that it will stop shrinking its balance sheet, and send the matured MBS back to the markets. The surprise came from the target of this new program – government bonds. This Quantitative Easing move will lower yields affects the mortgage market and is meant to make borrowing conditions easier – especially in the weakening housing sector.
Bernanke didn’t announce that the balance sheet will be enlarged, yet shifting the money to government bonds is an escalation in its steps. This shows that Bernanke is determined to prevent the US economy from sliding into the feared “double dip” recession.
Buying government bonds lowers their yields, making stocks more attractive. Indeed, stock markets immediately bounced back up.
The FOMC Statement details about the deterioration of the economy, which is recovering in a “more modest” fashion, and how the economic indicators have dropped since the last meeting of the Committee.
EUR/USD Erases False Break
Talks about dollar printing were here for over a weak, and they already took their toll on the dollar. But the tension reversed the trend. As the hours ticked towards the event, it seemed that it would turn into a “Buy by the rumor, sell by the fact”. The greenback regained its losses.
EUR/USD, that already passed the 1.3267 resistance line, lost it almost a day before the decision. In the hours before the announcement, it lost the all-important 1.3114 line, which it broke elegantly beforehand and remained safely above.
But with the release – this was erased – EUR/USD jumped over 1.32 and after calming down, it’s still far from 1.3114. The pair trades at 1.3180 at the time of writing. This turned out into a false break.
Also other currencies had the same behavior – losing ground before the release and winning against the dollar afterwards.
As always with decision from the Federal Reserve, it often takes time for the markets to fully digest the sometimes obscure messages, so we might have more surprises later on.
But after the dust fully settles, it’ll be each currency to its own: The Pound is in the limelight on Wednesday, the Aussie on Thursday and the Euro will attract attention on Friday. It’s never boring in forex trading!
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