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Forex: Dollar Plunge Outpaces S&P 500 Rally on Fed's Taper Surprise

Forex: Dollar Plunge Outpaces S&P 500 Rally on Fed's Taper Surprise

John Kicklighter, Chief Strategist

Talking Points:

• The Fed defied market expectations by deferring the Taper to keep $85 billion-per-month QE3 purchases

• While the S&P 500 advanced, the magnitude of the move paled in comparison to the Dollar's drop

• A severe, initial reaction to pro-stimulus event still does not ensure universal trends

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The FOMC policy decision is a perfect example of how surprise outcomes for event risk can generate severe volatility. Defying the market consensus, the Fed announced it would keep QE3 at $85 billion per month. Speculation for a Taper at this event has developed in earnest since the June gathering's press conference in which Chairman Bernanke laid out a rough time frame for the moderation of its unprecedented stimulus program. The premium / discount built behind this presumed outcome led to a sharp response as investors repositioned to account for the surprise. Moving forward, we need to gauge the market's appetite for continually building a risk position that is already mature as well as level of unwinding that the USDollar faces. We discuss this fundamental quandary, trade setups and more in today's video.

Find out what event risk can threaten the trade setups discussed in today's video with the DailyFX Economic Calendar.

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