Forex Market Weighs Latest FOMC Data Against Ongoing Cliff Concerns
Wednesday's rate decision from the FOMC (Federal Open Market Committee) was one of the most eagerly anticipated events over the past week for Forex market participants. The FOMC use this announcement to pass on information behind their decisions on interest rate setting and associated areas. The currency markets, in particular, are highly sensitive to interest rate announcements.
Two key changes were noted from the latest monetary policy update. The Fed advised it will increase quantitative easing through replacing the existing "Operation Twist", via purchasing of Treasury bonds (long-dated) on an outright basis. This method would be utilized instead of the current sale of shorter-term bonds for funding purposes. In other words, a continuation of the bond purchase element of the so called "Operation twist" but without the sales element.
Perhaps more surprisingly for many, the The Fed advised it intends on setting "thresholds" for unemployment and inflation relating to the underlying interest rates, and won't raise these rates until US unemployment reaches a 6.5% level, or until the inflation reading is over 2.5%. This gives an economic condition, which is 6.5% unemployment, as a clear guide for the Fed to consider tightening measures.
On the back of this data, the currency markets had the EUR/USD rate gaining significantly post the FOMC event risk, but trading in a tight consolidation range on the subsequent 13th December sessions as the market digested the FOMC information. The euro/dollar is now trading just under a key previous resistance area, as can be seen on our latest Forex blog EUR/USD technical update. Forex market participants are likely weighing up the latest FOMC data against the ongoing fiscal cliff concerns.
The US S&P 500 index broke a six-day winning streak on the 13th Dec, seeing a daily basis decline with elevated concerns around the so called "fiscal cliff" dominating risk sentiment as negotiations are yet to bring any solid steps forward.