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USD Rallies As FOMC Sticks To ‘Operation Twist’ - QE3 Bets Wane

USD Rallies As FOMC Sticks To ‘Operation Twist’ - QE3 Bets Wane

Tzu-Wen Chen, David Song,

THE TAKEAWAY: FOMC Maintains Current Policy In August > Sees Slowing Recovery > EURUSD Weakens Further Ahead Of ECB Rate Decision

The Federal Reserve’s two-day monetary policy meeting concluded today, with the Fed announcing that it would keep its key interest rate on hold at 0.25 percent, as expected. The benchmark rate has remained unchanged since December 2008, when the Fed implemented a 75 basis point cut from 1.00 percent.

Investors scoured through accompanying rhetoric from Fed Chairman Ben Bernanke for hints on the Fed’s stance on further monetary easing. At the last policy meeting in June, the Fed decided to forgo a third round of quantitative easing, or QE3, and opted to extend Operation Twist instead. The extension will take place through to the end of the year, and will result in another $267 billion of purchases in the 6 to 30 year bond range.

Bernanke maintained his “wait-and-see” approach and continued to soften his dovish tone for monetary policy as growth and inflation.

EURUSD 5-minute Chart: August 1, 2012

USD_Rallies_As_FOMC_Sticks_To_Operation_Twist_QE3_Bets_Wane_body_ScreenShot030.gif, USD Rallies As FOMC Sticks To ‘Operation Twist’ - QE3 Bets Wane

Chart created using MT4 – Prepared by Tzu-Wen Chen

Indeed, the EURUSD sold off as the FOMC stuck to its current policy in August, and the bullish sentiment underlining the reserve currency may gather pace over the remainder of the week as market participants scale back bets for another round of quantitative easing. As the EURUSD appears to carving out a lower top coming into August, we may see the pair continue to give back the rebound from July (1.2041), but hopes surrounding the European Central Bank interest rate decision on tap for Thursday may push the pair higher over the next 24-hours of trading as President Mario Draghi pledges to take the additional steps to stem the risks surrounding the region.

Summarized below are key points from the Fed’s policy statement:

- Fed 'will provide additional accommodation as needed'.

- Repeats exceptionally low rates at least through late 2014.

- Leaves Federal funds rate target at zero to 0.25 percent.

- Fed to keep reinvesting housing debt to mortgage securities.

- Labor market growth slow in recent months.

- 'Economic activity decelerated somewhat' in first half.

- Sees inflation over medium term at or below mandate level.

- U.S. household spending rising at somewhat slower pace.

- Housing sector remains depressed.

- Sees 'significant downside risks'.

--- Written by David Song, Currency Analyst and Tzu-Wen Chen, DailyFX Research

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.