Here we are ! The most important day of the month, the long awaited FOMC Statement day.
Why is it so important ? Because without QE1 in 2009 and QE2 in Q4 2010, EURUSD may not have rallied at the expense of the fed-damaged dollar. Since the second round of quantitative easing ended in June, the pair stopped its upward trend and consolidate in a triangle for about 4 months before breaking to the downside following concerns about Greece and the ruled out of fresh tightening at the August press conference by ECB chief Jean Claude Trichet, which is perceived as a dovish development for the euro.
The FED already stated that rates would remain near zero at least until mid-2013 but it is premature to interpret that as a downward spiral for the dollar. We first need to know what the monetary policy will be for the coming months, and that could be :
Why is it so important ? Because without QE1 in 2009 and QE2 in Q4 2010, EURUSD may not have rallied at the expense of the fed-damaged dollar. Since the second round of quantitative easing ended in June, the pair stopped its upward trend and consolidate in a triangle for about 4 months before breaking to the downside following concerns about Greece and the ruled out of fresh tightening at the August press conference by ECB chief Jean Claude Trichet, which is perceived as a dovish development for the euro.
The FED already stated that rates would remain near zero at least until mid-2013 but it is premature to interpret that as a downward spiral for the dollar. We first need to know what the monetary policy will be for the coming months, and that could be :
- QE3 Or Quantitative Easing 3, another round of stimulus aiming to flood the market with liquidity by artificially injecting more money into the economy. This is probably the last choice for Bernanke and I estimate at around 20% the chance of that announcement. This will be USD negative.
- Operation Twist Many analysts think that the Federal Reserve may be swaping short-term bonds with long-term bonds in order to affect the 10-year treasuries, which has a direct effect on mortgages and corporate loans. This would in essence contain the current balance sheet while artificially drive down the interest rate beyond current levels Speculation is centered on a roughly 70% chance for that annoucement and will be USD positive.
- Specific Target Based Monetary Policy This is perhaps more extreme than another round of Quantitative Easing, as the Fed sets targets of Unemployment Rate and CPI in order to hike interest rate. This is taking the last FOMC statement to another extreme. Visualize how the market reacted to the Fed languange of keeping rates unchanged until 2013, and now imagine that languange changed to keeping rates unchanged indefinitely, because essentially having a target Unemployment at 7.1% and CPI at 3.0%, as Fed Charles Evans is proposing, is exactly that. 10% chance USD negative.
There is no need to rush out on the news release, the annoucement could potentially impact the market for many months ahead.
Looking at the COT report it is clear that since last week speculators are expecting the USD to appreciate after the Fed annoucement and if they happen to be disappointed there can be some unloading moves which would be dramatic and do not expect technical analysis to perform in such environment. Orderflow is key