Both the EUR/USD and the AUS/USD have seen substantial gains following the statement from the Federal Reserve. In the statement the Federal Reserve laid out plans to hold interest rates at or near zero until late 2014. This language was more dovish than the December statement which assured the markets that interest rates would remain close to zero until mid-2013.
This language went against the consensus on the street, such as Goldman’s Jan Hatzius, who stated that he believed there was a good possibility that the FOMC statement would eliminate the 2013 language all together. Hatzius has a has a close relationship with New York Fed President Dudley (a former Goldman guy himself). That coupled with the fact that Bernanke has stated in the past that the most effective dovish statement is a surprise dovish statement could mean that the Fed was actively looking to manage expectations going into the announcement.
Those looking for a dovish statement were looking for language in the statement that would point to a large asset purchase program, otherwise known as QE3.
The US dollar tanked across the board on the release of the statement. EUR/USD has picked up 100 pips to flirt with the 1.3100 handle. While the AUD/USD has spiked 120 pips to close in on the 1.0600 handle. Gold also spiked $40 to crack the 1700 handle. This statement will likely reignite the gold bull market which has been quiet for the last several months.
The run up of the EUR/USD may not be a sustainable run as many of the shorts in the heavily shorted pair may have been stopped out and will reenter once the market settles down later in the day after the Bernanke press conference.
The fed statement could be just what the AUD/USD was looking for to make a run at the 1.10 highs of last summer. The AUD/USD has been on a historical run of volatility that has presented unprecedented opportunities for traders to ride the long swings in trends in a 2000 pip range.
6 of the members of the FOMC don’t even see a rate hike until 2015 or later. 6 members of the FOMC see the fed funds rate in 2014 at zero. The Federal Reserve has not targeted a jobs target rate.
All of the Federal Reserve’s forecasts look to a long term weak dollar and a lot of printing in the short and medium term. The target interest rate is 2%, so with their near term estimate sub 2% it is a clear signal that QE3 is on the near term horizon.
Filed Under: Economics
About the Author: Shaun Booth is editor of MilwaukeeStory.com.