Morning Report - FOMC drives USD strength. Gold, Aussie, GBP tank

The USD has had a great night and the FOMC minutes have certainly helped in suggesting that it may experiment with a reduction in the timing and scale of its massive bond buying program as soon as March. The fed is starting to recognize that the flow of easy money can potentially, or is, lead to instability within markets particularly at the stage where they need to withdraw or reverse the stimulus. Interestingly, rather than have a fixed end date at 6.5% unemployment which could cause huge ructions as all of us outside the Central Bank World know the FOMC members seem to have had a light bulb moment with the Minutes saying,

A number of participants stated that an ongoing evaluation of the efficacy, costs and risks of asset purchases might well lead the Committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred,

Sing Hallelujah! They get it finally but that doesn't make it any easier to empty the bath without the baby going down the plug hole and the review that they have flagged of their asset buying program at the March meeting is now a critical point for stocks and other markets.

These minutes seem like they might have put a top in place for stocks. 

The S&P has clearly hit resistance and although it hasn't backed off really the lack of follow through and the fact that it touched our fast moving average suggests to us that a reversal is coming. We are targeting a 30 point fall from here:

Importantly for FX markets it also has implications for the US dollar which will clearly be well supported and benefit if the Fed looks to reduce or is looking to reduce its bond buying program which has clearly been a tacit, if not overt, US dollar weakening program.

As you can see in the table below the USD had a good night.

 
Looking specifically at the AUD we can see the clear and volatile box that the Aussie is in at present. We sold with a stop at 1.0377 yesterday but took profit too early while asleep. Aussie will likely find some support today

GBP was under intense pressure from the BoE minutes which were equally interesting Outgoing Governor Mervyn King led an attempt, along with David Miles and Paul Fisher, to have the BoE increase the size of its bond buying program by £25 billion which was a surprise to the market. When taken in the context of the BoE recently increasing its inflation outlook the market is clearly fearful the risks are that the BoE throws caution to the wind in order to get the economy going which is putting further downside pressure on GBPUSD.

As you can see in the chart above GBPUSD has actually pierced the bottom of the support zone but not closed below it yet but it is very close and there is a lot of clear air between this level and 1.42.

Turning to gold the sell off continues which for us is not unexpected although the big fall through the bottom of the downtrend channel and the push well through the Bollinger bands is faster than we'd expected. But then again we have always thought that Heisenberg's Uncertainty Principle had a role in markets in so far as we can't know both the target and when it will get there it is one or the other so we focus on the target which remains $1525.

As you can see in the chart above Gold is pretty much on its lows for the day and well below the significant moving averages we watch. As we noted in previous notes our trend following systems are short but it seems the market is at risk of turning even more bearish if our calculation that the 50 day moving average at $1671 and the 200 day moving average at $1668 is correct. Should the 50 day moving average, the fast one but not our fast one, fall below the 200 day moving average, the slow on but again not our slow one, then we'd have a signal for many traders that the bear market has begun. So watch the moves in the next couple of days.

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