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What Will FOMC Bring? U.S. Dollar in the Balance as FOMC Mulls QE3

What Will FOMC Bring? U.S. Dollar in the Balance as FOMC Mulls QE3

2012-03-13 16:57:00
Christopher Vecchio, CFA, Sr. Currency Strategist

At his semi-annual testimony in front of Congress on February 29, Federal Reserve Chairman Ben Bernanke offered a cautiously optimistic on the direction of the American economy. However, it was what the chairman left absent from his testimony that proved to be market moving: Chairman Bernanke made no mention of a third round of quantitative easing.

In recent weeks, Federal Reserve officials have made waves with their differing views on the effectiveness of quantitative easing, and now market sentiment is leaning towards no such stimulus being offered up. With that said, it became apparent last week that the Federal Open Market Committee is considering another “Operation Twist” like effort.

Bernanke Testimony – AUDUSD 1-min Chart: February 29, 2012

What_Will_FOMC_Bring_U.S._Dollar_in_the_Balance_as_FOMC_Mulls_QE3_body_Picture_2.png, What Will FOMC Bring? U.S. Dollar in the Balance as FOMC Mulls QE3

Charts Created using Marketscope – Prepared by Christopher Vecchio

Whereas the U.S. Dollar strengthened after the chairman’s testimony on Capitol Hill lacking mentions of QE3, the world’s reserve currency depreciated immediately last week when it was leaked that the FOMC would consider another “Twist.” According to The Wall Street Journal’s Jon Hilsenrath, the Fed is considering a sterilized bond purchase program that would allow for easing while tempering inflation pressures (thereby satisfying doves and hawks alike). With the Fed Funds rate on hold indefinitely, market participants will look for rhetoric from the Fed about more easing.

Fed Considers More Twist – AUDUSD 1-min Chart: March 7, 2012

What_Will_FOMC_Bring_U.S._Dollar_in_the_Balance_as_FOMC_Mulls_QE3_body_Picture_1.png, What Will FOMC Bring? U.S. Dollar in the Balance as FOMC Mulls QE3

Charts Created using Marketscope – Prepared by Christopher Vecchio

If the statement accompanying the rate decision today shares the same tone that Chairman Bernanke’s testimony to Congress did, then the U.S. Dollar will likely find support. A weaker U.S. Dollar will only come if the FOMC takes a dovish stance accompanied by more promises of central bank intervention.

AUDUSD Strategy: Buy on QE3, Sell Otherwise

Given the reactions the market has exhibited on mentions of another round of easing – sterilized or unsterilized – it is likely that the U.S. Dollar falls against higher yielding currencies such as the Australian Dollar in the aftermath of such an event. The same can be said on the other side: higher yielding currencies and risk-correlated assets will likely fall if Chairman Bernanke and the FOMC fail to mention more easing.

Descending/Falling Wedge – AUDUSD Hourly Chart: February 21, 2012 to Present

What_Will_FOMC_Bring_U.S._Dollar_in_the_Balance_as_FOMC_Mulls_QE3_body_Picture_3.png, What Will FOMC Bring? U.S. Dollar in the Balance as FOMC Mulls QE3

Charts Created using Marketscope – Prepared by Christopher Vecchio

Certainly, the market is primed for an explosive move in either direction given the descending/falling wedge pattern that has formed on the hourly chart. Falling wedges in downtrends are often part of a reversal that is staging. With that said, this falling wedge takes place near at the yearly high in the AUDUSD, meaning this is likely a continuation pattern.

If QE3 is mentioned as a possibility or a sterilized bond purchase program is revealed to be in the works, look for the AUDUSD to test the upper range of the falling wedge at 1.0580. A clean break above said level dictates a move towards the 200-HMA at 1.0624 then the March 8 swing high at 1.0668.

If QE3 is left off the table and there is no mention of further easing measures, sterilized or unsterilized, a break of the weekly low at 1.0473 should be cleared for a test of the lower range of the falling wedge at 1.0455. A clean break below said level dictates a move towards the 200-DMA at 1.0403.

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, send an e-mail with subject line "Distribution List" to cvecchio@dailyfx.com.

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