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Forex Technical Report

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Fed Remains Committed to Low Interest Rates

Thu, Nov 5 2009, 06:05 GMT
by James Hyerczyk

ForexHound.com

The U.S. Dollar finished sharply lower today against most major currencies except the Japanese Yen.  Speculators bet early and often this morning that the Fed would do nothing with interest rates nor hint at an end to its stimulus plans.  These bets paid off as the Dollar weakened further after the FOMC announcement in the afternoon.

Demand for higher yielding assets was strong today and based on what the Fed said, bullish traders should have a free pass for the next thirty days.  The key will be a follow-through rally tomorrow.  If the Dollar does not follow-through to the downside tomorrow then nervous shorts are likely to cover their positions, much like the move last week following the GDP Report.

Today’s statement from the Fed was especially dovish.  It appears the Fed is afraid it will spook the markets and the economy if it takes a more aggressive stance toward hiking interest rates. In its statement the Fed explained in greater detail than previous statements why it remains committed to lower interest rates.  Basically, the gist of the statement is the economy is still fragile and operating at under capacity.  This is leading to low inflation.

Tomorrow the Bank of England and the European Central Bank issue their policy statements.  Expectations are the BoE and the ECB will leave interest rates at historically low levels.  The recent upside action in the British Pound makes one wonder if the BoE will decide not to extend its asset-purchase after all.  As late as last week, the talk was speculators were betting on the BoE extending its quantitative easing program, or essentially continuing its plan to pump money into the economy.  Speculator mentality somehow shifted over the week-end and the GBP USD is now in a position to break through the October high at 1.6691.

Looking at the chart, a breakout through this level will be extremely bullish.  However, if the BoE decides to extend and expand, the British Pound could get hit hard.  Tomorrow is likely to be a very volatile day in the Sterling.

The EUR USD closed well and could test 1.5000 again if trader appetite for risk increases as expected.  Demand for higher yields also gave a boost to the AUD USD and NZD USD.

Higher crude oil and gold prices helped support the Canadian Dollar. The chart pattern now suggests that 1.0522 is the next likely target for the USD CAD. 

The Dollar did post a gain versus the Japanese Yen.  This could be Yen traders speculating that U.S. rates will rise or the Fed may begin tightening up liquidity.  If the trend in demand for higher risk assets turns bullish again then look for the USD JPY to get hit hard to the downside as once again the Dollar will be treated as a carry-currency.

Published on  Thu, Nov 5 2009, 06:06 GMT