The Reason Behind the Fed's Foot-Dragging
The US dollar was hit hard by the Fed’s failure to signal a timetable for QE tapering on Wednesday, but it did not take tapering off the table, instead opting to take more time to assess the full economic impact.
The Federal Reserve kept interest rates and quantitative easing (QE) unchanged on Wednesday, which came in contrast to conventional expectations that the Federal Open Market Committee (FOMC) might signal some sort of tapering in September. The non-committal move from the Fed caused sharp volatility in FX, as the US dollar (USD) first weakened, then strengthened, and finally weakened again.
Two economic reports from earlier in the day helped spur enthusiasm among dollar bulls, as both the ADP employment report and US Q2 GDP numbers printed better than expected. The ADP reading came in at 200k, much higher than the 179K originally forecast, while GDP posted a 1.7% gain, much stronger than the 1% expected.
The robust US data failed to impress the FOMC policymakers, however, and the committee essentially maintained its course by refusing to commit to a definitive time for when it would begin to taper asset purchases. Instead, the FOMC statement repeated much of its earlier language, but did indicate that downside risks to the US labor market and overall economic outlook have diminished since last fall.
In short, today's statement from the Fed suggests that policymakers would like a bit more time to fully assess the economic conditions. As we noted Wednesday morning, "some analysts have argued that the Fed may not only be looking at US growth, but also at the global picture, especially in China, where the economic slowdown has been much more dramatic.”
As for FX, the dollar eventually started to sell off in reaction to the FOMC statement when traders fully digested the implications of the Fed’s rhetoric. The EURUSD finally broke through the 1.33 level and may now target 1.34, while USDJPY slid below 98.00 after making a half-hearted attempt to rally.
By Boris Schlossberg of BK Asset Management
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.