Greenback Pares Gains as Fed Takes Small Step to Ease Monetary Policy
The U.S. Dollar gave back much of its earlier gains Tuesday
afternoon after the central bankâ€™s Federal Open Market Committee revealed a
disappointing outlook for the U.S. economy.
The Federal Open Market Committee left interest rates
unchanged as expected as well as a majority of its policy statement from
previous sessions although it kept the language stating that inflation is
â€śsubduedâ€ť without specifically mentioning any issues with deflation. It also
added that interest rates would remain low for â€śan extended periodâ€ť.
The Dollar declined from its pre-report high as the Fed kept
its balance sheet intact while changing the composition of said balance sheet
by moving out of mortgages and into long-term Treasuries.
The FOMC vote was not unanimous, as Kansas City Federal Bank
President Thomas Hoenig once again remained the lone hawk. The vote was not
â€śbookendedâ€ť by any doves as some had anticipated.
Before the release of the report that was much speculation
as to how the Fed would address the issue of deflation. Concerns were being
raised because if allowed to spiral out of control, deflation would be very
difficult to contain, unlike inflation which the Fed usually battles with many
of its monetary policy weapons.
The move by the Fed was enough to keep the pressure on
interest rates while implying that the outlook for the economy remains rocky.
Some analysts felt the move by the Fed was merely symbolic, but did send a
strong signal that it was not going to stand on the sidelines doing nothing.
Moving principal payments from the mortgage market to long-term Treasuries
leaves the door open for the central bank to make more aggressive balance sheet
moves at its next meeting on November 3 should the economy fail to improve.
While not actually disappointing investors with its actions,
the Dollar did decline after an early morning surge triggered by speculation
the Fed would act move aggressively to loosen monetary policy because of a
slowing economy. Instead, the Fed may have acted more prudently with its action
rather than create an aura of pessimism with unnecessary aggressive action.
Traders shouldnâ€™t get too comfortable with the short-side of
the Dollar despite the initial reaction because trading conditions suggest the
Greenback is ripe for a rally due to increasing interest in safe haven assets.
The next few days will give more clues as to whether the Dollar will rally or
resume its recent decline. The first sign of weakness will be new highs in
markets that have corrected the past two days, namely the Euro and the British
Pound. The Euro and the Sterling
both bounced back following earlier weakness, but not enough to reverse the
Overnight a softer U.K. housing report overshadowed
this afternoonâ€™s U.S. Federal Open Market Committee announcement as falling
house prices increased jitters in an already fragile economy.
Early in the trading session, a report from the Royal
Institution of Chartered Surveyors said July house prices turned negative for
the first time since July 2009. This report echoes earlier reports that showed
a rising supply of houses for sale and decreased buyer interest. The return of
a buyers market indicates the strong possibility of a softer housing market
through at least the end of the year, leading to speculation of a double-dip
Technically, after failing to follow-through to the upside
following the penetration of a major Fibonacci retracement level at 1.5967 in
two out of the last three trading session, the British Pound took out a main
swing bottom at 1.5819. This move turned the main trend down on the daily
chart. The chart pattern suggests that 1.5633 is the next likely downside
target, followed by an uptrending Gann angle at 1.5400.
Concern about a slow down in the global recovery also
pressured the Euro. Before the New
York session opening, the Euro was trading on its
low, threatening to turn the main trend to down on the daily chart on a move
through the last swing bottom at 1.3119, a move which took place shortly after
the NY opening.
Based on the range of 1.1876 to 1.3334, the chart indicates
that this current break could turn into something substantial if investors
decide to begin shedding risky assets. If this current break turns into a hard
correction, the daily chart indicates that 1.2605 would be the minimum downside
target. This price represents a 50% correction of the June to August rally.
Besides the start of downtrends in the Euro and British
Pound, the shedding of risky assets such as gold and crude oil could be another
sign that the Dollar is getting set to rally. Falling commodity and equity
markets are likely to pressure the commodity-linked currencies.
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