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FX Morning update - US dollar falls after FOMC decision

By Michael Hewson

Date: Wednesday 17 Mar 2010

FX Morning update - US dollar falls after FOMC decision

The dollar fell back last night after the Federal Reserve signalled no change on interest policy for an “extended period”. The lone dissenter to the Fed’s dovish stance, Kansas Fed President Thomas Hoenig remained in a minority of one.

The tone of the statement was more positive than last month about the economic outlook, and the purchase of mortgage backed securities will stop as expected at the end of this month, with no extension. However there was a concern that unemployment will remain high and the recovery still looks weak and as such the Fed decided that they would proceed with their “softly softly” approach.
With yesterdays import prices showing very little in the way of inflationary pressure it seems that the Fed is still reluctant to move beyond last month’s discount rate hike and prepare the ground for firmer rates in the shorter term.

The main gainer from last nights decision was sterling which broke higher squeezing those record short positions, however in a speech last night monetary policy committee member Charles Bean warned the deficit is a major problem and still needs to be dealt with. Bank of England minutes are due out today and these are expected to offer no surprises while unemployment data is expected to show a much smaller increase than last month at around 6k, while the ILO unemployment rate is expected to stay at 7.9%.

The Euro has continued to be supported by hopes of some form of help for Greece; however it seems difficult to see how this can be done without invalidating the no bail-out clause, in the Euro zone as well as being illegal under the terms of the German constitution.

While in Japan the Bank of Japan extended its bank lending program, making credit more easily available to banks, which weakened the yen.

EURUSD - the Euro continues to be capped with resistance now at 1.3800/10. A move and close above 1.3800, could well precipitate a move towards 1.4000, but after the Fed’s decision last night, and the talk of help for Greece the possibility of a break is increasing. Keep an eye on the 50 day MA at 1.3870 if a break occurs.
The market needs to break back below the support at 1.3710/20 to re-test this weeks low at 1.3640 and trend line support from the lows around 1.3430. The key downside support remains at 1.3485 on a daily close, with interim support around 1.3710/20.

GBPUSD – Sterling was one of the main beneficiaries of the Fed decision last night and broke above last weeks highs at 1.5210/20 towards 1.5270. This break and close above 1.5200 could well target 1.5330 in the near term; however problems still remain, a fact acknowledged by MPC member Charles Bean in a speech last night. He raised the prospect of further QE if necessary, or an increase in rates if circumstances dictated, as the recovery unfolded.
Trend line support from the lows at 1.4780 comes in at 1.4935, while the key downside level on the cable remains at 1.4850, the 61.8% retracement of the up move from 1.3500 to the highs at 1.7045. A break below here would re-target 1.4400, the 22nd April 2009 lows.

EURGBP – the pound gained overnight pushing the EURGBP cross towards the lower end of its range close to support at 0.9020. The triple highs at 0.9150 are the key barriers to further Euro upside here. The last few rallies continue to stall at this level, and remain the key barrier to further sterling losses. Euro dips should find some buyers around 0.8980 and 0.9020.

USDJPY – last nights Bank of Japan meeting saw the bank extend its bank lending program making credit more easily available. This should weaken the yen and send the dollar up towards the 91.15 resistance and the 91.75 area. Yen repatriation by Japanese exporters should cap the dollar near this level. A break below 90.20 could see a drift down towards the bottom of the cloud at 89.30. The upside will continue to be capped while the highs around 91.15 and the 200 day moving average at 91.75 weigh on the market.

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