Fed Shocks FX Markets Holding Asset Purchases Unchanged at 85B, USDIDX to 7-month Low - 19.9.2013

The Federal Reserve decided to shake the financial markets by leaving its asset purchase program unchanged in a highly surprising move. As we have previously addressed, surveys from Reuters and Bloomberg was giving more chances to asset tapering. However, FOMC committee said that “decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.” Therefore the US quantitative easing remains steady at $40B purchases of mortgage-backed securities per month and $45B purchases of longer-term treasury securities per month. The interest rate would remain unchanged at 0-0.25% as long as the unemployment rate is more than 6.5% and inflation projections for the next 1-2 years are not more than 2.5%.

Starting from FX markets, we saw yesterday the US dollar losing substantially against its major peers with its index sharply dipping to support at 80.03 from earlier level at 81.15, losing more than 1.3%.

The Euro jumped to a new 7-month high against the US dollar taking advantage of the shocking Fed decision to maintain monetary policy. The EURUSD gained more than 1.5% as penetration of key resistance at 1.3451 triggered more buy orders. The other European currency, the GBPUSD also moved sharply to fresh 8-month high, hovering above key psychological resistance at 1.60 and reaching as high as 1.6161.

Concerning Federal Reserve Projections, the 2013 GDP growth was downgraded to 2.0-2.3% compared to June projection of 2.3-2.6%. Perhaps the decision to hold asset purchases at $85B was to support growth, while inflation is projected to be between 1.1-1.2% in 2013. For 2014 Inflation was downgraded to be between 1.3-1.8% in Sep.18 report compared to 1.4-2.0% in June 19 projections. Lastly, one of the key thresholds for key rates increase, the unemployment rate was projected to be between 7.1-7.3% in 2013 and ranging in 6.4-6.8% in 2014, almost the same compared to June report. Most members of the committee are expecting that the timing of key rate rising would be in 2015, where the highest of projected unemployment rate is at 6.3%, growth estimated to be above 3.0% and inflation approaching its 2.0% target.