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The big news overnight was the fallout/euphoria from the US Federal Reserve rate announcement, statement, and press conference. As expected, no policy changes, however everyone is talking about the hawkish update to the Fed’s economic outlook and press conference.

 Let’s start with the outlook, as mentioned in yesterday’s ‘post-Fed’ Cambridge Market Update, markets were caught off guard by the new forecasted unemployment range of 6.5% to 6.8% in 2014, this is a big departure from May’s forecasted range of 6.7% to 7.0%. During the press conference, Bernanke reiterated that 6.5% is not an automatic trigger for tightening, rather benchmark that would lead the Fed to revisit the suitability of its current stimulus programs.  

Turning to the press conference, there was a degree of incongruity,  one aspect which was more hawkish than expected was the amount of content the focused not just on the tapering of QE, but a complete exit of the program. Then other parts of the press conference emphasized the Fed’s vigilance against downside economic risks that lurk in dark corners.  

Add to that the guidance Bernanke provided that “if the incoming data [is]broadly consistent with forecast[s], the Committee currently anticipates that it would be appropriate to moderate the monthly of purchases later this year”, a statement that a couple of months ago would have been unheard of. Conculsion: more, less, or none, when it comes to QE the Fed is ready and willing to do what needs to be done.  

Though inconsistencies left many analysts scratching their heads, the bullish sentiment from Bernanke a Co. was heard loud and clear.The response in currency markets has been decisive: Bullish USD. Through the overnight session the Greenback reclaimed ground from pretty much the entire market, with particularly notable gains against the AUD, NZD, NOK, JPY, and CAD. Specifically the USDCAD, which at one point yesterday was below 1.0200, during the overnight session closed in on the 1.0400 handle. It has since consolidated, but the move constitutes a clear break-out of the range the pair has traded in over the last couple of weeks. Forward looking a break of resistance the pair struggled with in May in the mid 1.04 area will be key to reestablishing the broader rally from the end of 2012/early 2013.The AUDUSD touched its lowest level since 2010, and continues to look heavy as sentiment and volatility lead to a broad unwinding of carry trades.

Also weighing on the Aussie overnight was weak Manufacturing PMI, the HSBC version, not the state version, adding fuel to the fires of concern that the world’s second largest economy is faltering. The Kiwi also had a tough day when during local trading hours quarterly GDP data missed expectations: +0.3% actual, +0.5% expected. The NZDUSD continues to plunge new lows in the sub-0.8000 region.  

While a short term profit taking driven correction in the near term is in the cards, previous commentary has used the term “Summer of USD”. It’s starting to feel like yesterday’s Fed meeting might confirm that. Much of the analyst commentary circulating on trading floors this morning is talking about the beginning of a trend in USD bullishness not a once off realignment in the market.Quickly scanning headlines from European trading and the early morning, markets largely shrugged off better that expected, though still mostly contractionary, European Manufacturing & ServicesPMInumbers. Also monthly British Retail Sales, which advanced 2.1%, don’t seem to have had much of a lasting impact despite handedly besting expectations of 0.8%. During its regularly scheduled rate announcement and press conference, Swiss National Bank president Thomas Jordan confirmed the central bank’s intention to defend the EURCHF floor of 1.2000 (EURCHF is currently trading with a 1.23 handle),  stating that the Franc remains “high”. Turning to North America weekly US unemployment claims rose more than forecast to 354k versus a consensus forecast of 340k. Markets however haven’t really responded to the number, as the focus remains on the yesterday’s Fed and the trading theme’s that have emerged due to it.Have a great day!