The dollar declined to a three-month low as the Federal Reserve unexpectedly refrained from reducing its $85 billion in monthly bond purchases and will keep pumping money into the economy in an attempt to boost growth.
Fed policy makers “decided to await more evidence” of economic progress, including holding its interest-rate target at almost zero until the unemployment rate falls below 6.5 percent. A survey of economists forecast a $5 billion reduction of Treasury purchases.
“The lack of tapering and lack of adjustment to the unemployment threshold is driving the dollar lower,” Vassili Serebriakov, a foreign-exchange strategist at BNP Paribas SA in New York, said in a telephone interview. “It’s one of the most dovish outcomes possible.”
Fed Chairman Ben S. Bernanke previously said he expected the central bank to complete its asset-purchase program in the middle of next year when the unemployment rate is around 7%, down from August’s 7.3%. Bernanke and the Federal Open Market Committee have said they won’t consider raising its federal funds rate target as long as unemployment is 6.5% or higher.
The Federal Reserve on Wednesday cut its U.S. growth forecast for the third time this year, saying the economy is likely to expand between 2% to 2.3% in 2013 instead of its original estimate of 2.3% to 2.8%. By 2016, the central bank predicts U.S. growth will accelerate to a range of 2.5% to 3.3%, with short-term interest rates rising from zero to an average of about 2.25%. The central bank also trimmed its growth projection for 2014 and kept its estimate for 2015 largely intact, according to its "central-tendency" forecast. Inflation as measured by the PCE index is not expected to exceed 2% for at least four years. The Fed predicts an inflation rate of no higher than 1.2% in 2013, rising to a range of 1.7% to 2% by 2016. The unemployment rate, meanwhile, is forecast to fall to as low as 7.1% at the end of 2013, 6.4% in 2014, 5.9% in 2015 and 5.4% in 2016. In light of these predictions, the vast majority of Fed policymakers predict the bank will not raise the short-term fed funds interest rates until 2015. By 2016, the fed funds rate could move to a range of 1.75% to 2.25%.
Bloomberg surveyed 41 economists after the Fed decision and 59% of them see the Fed tapering in December. The median now sees the taper completed in September 2014.
Fed’s George said on Friday that decision not to taper was disappointing as "costly steps" were taken, including Fed communication, to prepare markets for a chance to QE. George said before the meeting she wanted a $15 billion taper.
According to Fed’s Bullard the pace of tapering will be data dependant.
If payrolls and unemployment continue to show improvement, likelihood of a taper is greater He wants to see evidence of inflation before endorsing any policy action
The latest bout of U.S. economic data came in mostly upbeat.
The Philadelphia Fed’s manufacturing index jumped to a reading of 22.4 in September — the highest reading since March 2011.
Leading indicators climbed 0.7% in August while the number of people applying for new unemployment benefits climbed by 15,000 in the week ended Sept. 14 to 309,000. Economists forecast a climb to 338,000.
EURO
The euro continued to move higher, although the pace of the advance has tempered over the last hours as investors continue to assess latest developments. Even though EUR/USD set a fresh 7-month high of 1.3568 during the European session, some consolidation, and even correction, seems only natural after the sharp rally.
Germany will hold federal elections on Sunday. An INSA opinion poll published yesterday showed both the opposition Social Democrats and Angela Merkel’s Christian Democratic-led group will fall short of a majority with their preferred coalition partners.
A poll from Forsa shows:
Merkel at 40% with her coalition partner at 5%
The opposition Social Democrats at 26% and coalition partner Greens at 10% -- both up 1 point since the last polls
The far left was at 9%
The anti-euro Alternative for Germany was at 4% but needs 5% to get to parliament
A big coalition undercuts Germany's position as a strong leader in Europe.
EUR/USD consolidates near $1.3520, below post FOMC highs on $1.3570. Strong resistance comes at $1.3600 (Feb 5 and 6 highs) with the stronger resistance is near yearly high on $1.3712. Initial support comes at $1.3400 (channel line from Sep 6). Below support is around Sep 13 lows on $1.3250.
POUND
The pound strengthened versus the dollar after Bank of England minutes showed policy makers saw no need for more stimulus.
Sterling strengthened for a fourth day as the minutes of the Sept. 3-4 meeting showed “no member judged that further stimulus was appropriate at present.” The minutes also showed the panel voted 9-0 to keep the bond-purchase program at 375 billion pounds ($599 billion).
The pound retreated after weak retail sales.
National Statistics informed on Thursday that year-over-year UK Retail Sales grew 2.1% in August, compared with the 3% increase in July and below forecasts of +3.3%.
On a monthly basis UK Retail Sales dropped 0.9% in August, after growing 1.1% in July and against expectations of increasing 0.4%.
Annual Retail Sales excluding Fuel climbed 2.3%, down from the 3.2% rise and below market consensus of 3.1% growth.
GBP/USD retreated to $1.6000 (channel line from Sep 6). Below support comes at $1.5780 (Friday’s lows). Initial resistance is around recent highs on $1.6145. Above the resistance comes at $1.6200 (channel line).
YEN
Japaneese currency eased after BOJ’s Kuroda said the BOJ policy clearly having a positive impact on economy and CPI shows broad improvement in price trend. He also noted Japan’s economy can continue moderate recovery and the BOJ will continue QE as long as deemed necessary for price stability. Kuroda added Japan is starting to find its way out of 15 years of deflation.
USD/JPY recovered to Y99.50 (61.8% Fibo of the Y100.60 - Y97.90 decline). Above resistance comes around Y100.00 (Friday’s highs) and Y100.60 (Sep 11 highs). Below Y97.80 support comes at Y97.50 (trend line from Jun 13) and Y96.80 (Aug 27 lows).
COMMODITY CURRENCIES:
UBS changed AUD, NZD, CAD forecast
“Given Bernanke's dovish stance at the September FOMC meeting, we believe there is short term upside for the so called commodity currencies”.
“The CAD should profit and we expect USDCAD around parity over the coming six months”.
“The message of ‘QE for longer’ from the Fed does not change our long term bearish stance on the AUD, but limits AUDUSD downside in the short term. “We move the three month forecast from 0.85 to 0.90”.
“We change NZDUSD forecasts to 0.80 (previous 0.75) over the whole horizon”.
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