Search ForexCrunch

The FOMC released its statement, and it contains no changes in policy: Operation Twist will continue as planned, and the conditional commitment to keep interest rates low up to mid 2013 remained in place.

EUR/USD dropped before the release to 1.3775, within levels seen during the day. Earlier in the day it climbed and challenged resistance at 1.3838. It extends these drops after the release of the statement but doesn’t go too far. The press conference is awaited.

Follow a live blog of Bernanke’s press conference.

One interesting thing in this statement is that there was one dissenter, but in the opposite direction: Charles Evans who “supported additional policy accommodation”. The Fed also acknowledges the economic improvement, but remains very cautious:

…economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year. Nonetheless, recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has increased at a somewhat faster pace in recent months. Business investment in equipment and software has continued to expand, but investment in nonresidential structures is still weak, and the housing sector remains depressed.

Update: EUR/USD is dipping lower towards support at 1.3725 and dipping even lower. Further support is at 1.3650. For more, see the euro dollar forecast.

In the last meeting, Operation Twist was announced. The idea was to actively sell short term bonds and buy long term ones, in order to lower long term interest rates and encourage spending. But this was more of a compromise: 3 out of 10 members dissented from this decision. 2 others preferred a further monetary loosening: a third round of quantitative easing.

Some commentators had expected the Federal Reserve to begin hinting about QE3, given the high level of unemployment and the willingness of some members to ease further. This didn’t happen, and is the reason for the dollar’s strength.

In the FOMC preview, I wrote that the Fed is likely to take a break after the recent moves (Operation Twist and mid 2013 low interest rate pledge) and even upgrade its forecasts.  Recent US figures came out better than expected, especially GDP in the third quarter, which showed a rise of 2.5% (annualized).

Chairman Ben Bernanke, will hold a press conference at 18:15 GMT and might release interesting statements. The current moves are cautious, as the tension is still high towards the press conference. The move could accelerate during and after the presser.