Fed Leaves Rate Unchanged; Focus Shifts to Inflation

On Tuesday, the Federal Reserve left its benchmark interest rate unchanged and reiterated that interest rates would remain low for “an extended period”. In its statement, it also mentioned that inflation remains subdued, and that the weak employment situation seems to have stabilized. While this may sound rosy, the Fed did express concerns about housing and employer reluctance to increase payrolls.

On Tuesday, the Federal Reserve left its benchmark interest rate unchanged and reiterated that interest rates would remain low for “an extended period”. In its statement, it also mentioned that inflation remains subdued, and that the weak employment situation seems to have stabilized. While this may sound rosy, the Fed did express concerns about housing and employer reluctance to increase payrolls.

The tone of the statement suggests that while the Fed seems to have a plan as to how to begin reducing stimulus and returning interest rates to normal, it still is having trouble deciding when to initiate the first rate hike. One obstacle it faces is the possibility it will kill the recovery if it hikes too soon. The other more important obstacle is inflation. Although by its standards, inflation is low, there is a possibility that all of the liquidity that has been pumped into the financial system may trigger a spike in prices.

The overall dovish tone of the statement gave the go ahead for traders to continue to use the Dollar as a funding currency thereby driving up demand for higher risk assets.

The U.S. Dollar finished lower as the rise in equity indices and the prospect of lower interest rates for an extended period drove up demand for higher risk assets.

The EUR USD extended its gains after the Fed statement. Earlier in the session, the Euro was up on the news that Standard and Poor’s reaffirmed its rating on Greek debt. Some traders were concerned of a possible downgrade but these worries were for naught. The decision by the S&P Corp. now shifts the pressure on the Euro Region nations to create a bailout program. Technically, the main trend is up on the daily chart with 1.4000 a near-term target. This market is expected to move higher in an attempt to drive the numerous shorts out of the market.

The inability to break to new lows helped to trigger a short-covering rally in the GBP USD. Tuesday’s move erased all of Monday’s losses and put this market in a position to regain a major 50% level at 1.5217. Additional resistance comes in at 1.5297 to 1.5419. Despite the strong rally, the fundamentals remain weak because of political uncertainty in the U.K., a weak economy, debt concerns and a dovish monetary policy.

The USD JPY traded slightly lower despite strong gains in the U.S. equity markets. A .618 retracement level at 90.61 provided the most resistance. The charts indicate that a breakout over a downtrending Gann angle at 90.83 is likely to trigger an acceleration to the upside. The Bank of Japan is expected to announce on Wednesday that interest rates will remain low and that additional stimulus will be provided to help drive the recovery.

The strength in the Euro helped push the USD CHF lower. A break through an uptrending Gann angle at 1.0590 helped to trigger an acceleration to the downside. The chart formation suggests this market is headed to a 50% level at 1.0513.

Demand for higher yielding assets helped the USD CAD extend its losses. Downside momentum is building which has this market in a position to drop to parity. The language in the Fed’s statement suggests that demand for higher risk assets should continue to increase pressure on the USD CAD. Today’s rally in equities, crude oil and gold all contributed to the rise in the Canadian Dollar.

Strong demand for higher yielding assets helped to support the AUD USD in light trading. Technically, the trend is still up. Today’s rally through Friday’s reversal top at .9194 reaffirmed the uptrend. The Fed’s decision to leave interest rates low gave trader’s the green light to drive the Aussie higher.

Strong upside momentum in the NZD USD sent this market into a key 50% price level at .7124. The inability of the Fed to offer any clues as to when it is likely to hike interest rates makes some traders believe that the Reserve Bank of New Zealand will raise interest rates before the Fed does. This is increasing demand for the higher yielding Kiwi.

James A. Hyerczyk has been actively involved in the futures markets since 1982. He has worked in various capacities within the futures industry from technical analyst to commodity trading advisor. Using W. D. Gann Theory as his core methodology, Mr. Hyerczyk incorporates combinations of pattern, price and time to develop his daily, weekly and monthly analysis. His firm, J.A.H. Research and Trading publishes The Forex Pattern Price Time Report... More

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