USD rallies on the back of the Fed

The main theme from the US trade was a USD rally on the back of the FOMC meeting. The market was positioned for a fairly cautious tone from the Fed and many were surprised by the hawkish tone.

The key things to take-away from the Fed were that the downside risks to the economy and the labour market have diminished. As a result, the Fed actually revised its unemployment forecast and said it is on track to end asset purchases in mid-2014.

With the Fed set to start reducing asset purchases later this year, equities came off as the stimulus-fuelled rally starts to unwind. However, this is largely dependent on economic data being consistent with the Fed’s forecasts. Markets completely ignored comments about rates being the same until at least 2015 and focused on stimulus instead. The sharp rise in the USD caused some mayhem in the FX market as risk currencies slumped against the greenback. DXY jumped from 80.50 to 81.50; we could see it edging towards the 84 region again.

AUD/USD extended its losses, printing a low of 0.926, its lowest level since September 2010. There have been growing calls for AUD shorts, but not many expected the sell-off to be quite as drastic. Near-term targets will now be at the psychologically important $0.90 level. However, we would be hesitant about selling the pair here. Selling a recovery into $0.95 is potentially a safer bet. There is more event risk on the way for the Asia session, with China’s HSBC flash manufacturing PMI due out. The market is looking for a reading of 49.4 and we really need to see a strong result as China is in desperate need of some good news.

EUR/USD gave up the $1.34 level and dropped to a low of 1.326. There is plenty of data due out of Europe later today, with several PMIs to look out for. Further evidence that the region’s economy is not in great shape will only mount pressure on the ECB to act. Near-term support for the pair is in the 1.32 region. Japanese officials will be happy to see USD/JPY push higher, printing an intra-day high of ¥97 before a minor pullback. We feel there is scope for further gains in USD/JPY in the short term and tomorrow’s speech by BoJ Gov Kuroda could be a short term catalyst.

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