US dollar recovered ground as Fed tapered again

Yesterday in the NY session, one of the most important events of the week was scheduled. The Fed interest rate decision was lined up. The market was expecting the Fed to taper again in March. The outcome was as expected as the Fed decided to reduce the QE3 pace by another $10B from $65B prior to $55B, and kept the interest rates at 0.25%. Now, the Fed Pace of Treasury Purchases will be $30 billion and Fed Pace of MBS Purchases will be $25 billion.

Some of the highlights from the Fed statement:

The Fed lowered the 2014 jobless rate forecast from 6.3 percent-6.6 percent to 6.1 percent-6.3 percent.

The Fed now sees the inflation a bit higher in 2014, as they revised the previous estimate from 1.4 percent-1.6 percent to 1.5 percent-1.6 percent.

They lowered their growth forecasts too – It now stands around 2.8%-3.0% down from the previous estimate of 2.8%-3.2% in 2014. And, for 2015 the growth forecast lowered from 3.0%-3.4% to 3.0%-3.2%.

One of the fed members sees the possibility of 1.0% rate by the end of 2014.

They eliminated the 6.5% unemployment rate threshold.

I think the outcome was supportive of the US dollar. The fed lowered the expectations of the labor market as well, but that doesn’t mean that we can oversee other factors influencing the economy. The removal of the unemployment level threshold was huge, but the rate expectation is the one which makes the difference. That is the sole reason why the US dollar jumped across the board, and traded higher against the Euro, the pound, New Zealand dollar, Australian dollar and the Japanese Yen.

The Fed mentioned in the statement that “the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and labor market conditions will continue to improve gradually, moving toward those the Committee judges consistent with its dual mandate”. This is not all the fed says that they will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities.

The Fed chairman Yellen also delivered a speech after the release. She reiterated the Fed’s commitment of the 2% inflation target. She mentioned that there is more to do in the labor market. She also said that the Fed will try not to be cause market instability, which is very important, in my opinion.

Looking ahead, we now have to keep a close eye on the incoming data. The weather played its part in the recent times, but moving forward one must notice an improvement. If the economic conditions and outcome misses the Fed expectation, then the one can even see some action from the Fed.

One more important event which was scheduled during the yesterday’s European session was the UK employment data. The outcome was far better than the expectations, as the number of people claiming unemployment in the UK fell by 34,600, beating the expectations of 25,000. The UK’s unemployment rate remained at 7.2%, as expected by the market. The GBPUSD traded higher post release, but failed to gain the momentum. The pair as of writing is trading below the 1.6560 support level, as the Fed decision also weighed on the sterling strength.

Technically, let us look at the EURUSD. The pair also fell yesterday after the fed decision. The pair is now coming closer to an important up-move trend line, as can be seen in the chart shown below. There is also a critical support level at around the 1.3810 level. This support level is coinciding with the trend line. So, this area is crucial for the pair in the short to medium term. If the pair fails to hold the support zone, then it can move lower towards the next possible support, as highlighted in the chart. On the upside, the resistance now resides at around the 1.3880 level.

So, keep an eye on all important levels friends and trade accordingly.

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Happy Trading Friends!

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