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The Fed did not change policy but did add fresh warnings about inflation. This is different than the previous statement and  initially  weighed on the dollar. This is a very modest change. The $85/month bond buying program continues, and the rate remains at rock bottom. The FOMC was not expected to make any policy announcement at this meeting, that wasn’t accompanied by a press conference.  

EUR/USD managed to recover from earlier losses and challenge 1.33 once again. The yen, pound and many other currencies remained depressed after better US data. The initial move is a weaker dollar. EUR/USD is above 1.33.  USD/JPY is under 98.

Here is a part of the statement that relates to inflation:

Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term

In June, James Bullard dissented from the decision, mostly because of inflation. This time, Bullard didn’t dissent.

There was only dissenter, Esther George, which is a known hawk.

What about tapering of QE? The statement doesn’t provide anything new:

The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.

In theory, the Fed could even “un-taper”, but this language isn’t new. The balanced approach remains, and the Fed is cautiously optimistic from recent developments.

Updated market reaction

  • EUR/USD went as high as 1.3335 but is now below 1.3280, back to the range of recent days. Also other currencies are re weakening against the USD. This is a clear false break.
  • GBP/USD jumped to almost 1.5220 and is back to 1.5150. It showed weakness early in the day.
  • USD/CAD fell down to 1.0250 and it rose back to just under 1.03. Canada showed solid growth.
  • AUD/USD showed great weakness: it didn’t managed to tackle the 0.90 line it lost earlier in the day, and even dipped to new lows at 0.8935 before stabilizing.

Update 2: after a fall and a recovery of the dollar, it is falling once again. EUR/USD makes a second move up and it is now at 1.3320. So, do we have the real break after the false one?

The fireworks are expected for September, that could feature a “Septaper” – an announcement about tapering of QE. What will the next chairman do? It might be Larry Summers.

Earlier in the day, ADP Non-Farm Payrolls surprised to the upside and raised hopes for the NFP on Friday. GDP was more mixed: while Q2 growth surprised to the upside, Q1 underwent a big revision and part of the gain in Q2 GDP was due to growth in inventories.

Further reading:  Fed Chairman Larry Summers? Turbulent Times Ahead