• Fed committed to extended period of low rates
  • Risk correlated assets rally into New York close
  • Franc puts in one of its strongest days on record
  • Markets still too volatile to make any clear directional calls

Although the Fed failed to introduce a formal third round of quantitative easing at Tuesday’s meeting, the commitment to leave rates low until mid-2013 and an openness about considering additional policy tools to promote stronger economic recovery, seemed enough to inspire the necessary confidence to spark a much needed relief rally in risk correlated assets. After getting slammed on Monday and for much of Tuesday trade, risk sentiment was finally able to mount a recovery into the New York close on Tuesday.

As things correlate, the reaction resulted in a material rebound in equity prices, while oil was also well bid off its lows. Meanwhile the USD was broadly lower, with the commodity bloc currencies leading the charge. The Swiss Franc remained exceptionally well bid just off record highs following a historic day which saw the currency track higher by some 5%, a move that had not been seen in this market in 40 years. The Yen also remained well bid, and it seems as though market participants were content on buying back into risk but also staying diversified through investment in the safe haven Franc and Yen. Finally, gold once again surged to fresh record highs, but after stalling ahead of $1800, more offers came in to take the market back towards daily opening levels.

At this point, it is far too difficult to make any calls as far as where markets are headed from here, with prices whipsawing a few hundred points in either direction with little to no effort. There is still a high level of uncertainty out there and some significant question marks with regard to the stability of the global financial system. US and Eurozone structural problems have not gone away, while China is also showing evidence of cooling. As such, we recommend remaining on the sidelines until things calm down a bit and a clearer directional bias presents.

ECONOMIC CALENDAR

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TECHNICAL OUTLOOK

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EUR/USD: The market continues to adhere to a bearish sequence of lower tops since May, with a fresh lower top now in place by 1.4535 ahead of the next downside extension back towards and eventually below 1.4000. In the interim, look for any intraday rallies to be well capped ahead of 1.4500, while only back above 1.4550 delays.

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USD/JPY: Setbacks have stalled out just ahead of the 76.25 record lows from March, with the market dropping to 76.30 ahead of the latest reversal. Given that we are seeing the rate by record lows, we would not at all be surprised to see the formation of a material base in favor of significant upside back towards the 82.00 area over the coming sessions. However, the overall structure still remains bearish and it will take a break back above 80.00 to officially alleviate downside pressures and confirm reversal prospects. Below 76.25 negates.

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GBP/USD: Despite the latest rally back above 1.6400, the market still remains locked in a broader downtrend off of the April highs, and a fresh lower top is now sought out somewhere ahead of 1.6550 in favor of the next downside extension back towards the recent range lows at 1.5780. Ultimately, only a break back above 1.6550 would delay bearish outlook and give reason for pause, while back under 1.6200 should accelerate declines.

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USD/CHF: Despite the intense downtrend resulting in recently established fresh record lows by 0.7000, short/medium/longer-term technical studies are violently stretched, and we continue to like the idea of taking shots at buying in anticipation of a major base. Still, at this point, fading this trend will require some upside confirmation and we would look for a break back above 0.7600 at a minimum to open the door for these reversal prospects and alleviate immediate downside pressures.

Written by Joel Kruger, Technical Currency Strategist

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