FOMC Takes Action and Ironically Fuels Pessimism!

By FX Empire.com

The market is all about the aftermath of the Fed’s move last night, where the new measures announced are seen inadequate and the fears have intensified over the dire outlook for the economy from the Federal Reserve!

Growth woes are cemented in the market and the losses are spread across the board with the greenback the sole winner at this time. Asian markets started the day with heavy losses and the scenario continued into Europe.

The Federal Reserve pointed to “significant downside risks” to the growth outlook which echoed negatively across markets and sent the Japanese Nikkei 225 index lower by the most in more than a week by 2.07% 8560.25.

We can see clearly that the growth outlook is worsening, and as the Fed’s said it, the market tension from the debt crisis in Europe is of the biggest downside risks. Greece did its part by announcing new austerity measures last night and said it would deepen pension cuts and extended the property tax while also put thousands of workers on notice all only confirmed the dire situation as the Troika heads back to Athens next week.

Incoming data prove that the fear of recession is materializing with China’s flash manufacturing PMI falling to a two-month low indicating a broadening slowdown in the economy; the advanced PMI dropped to 49.4 in September from 49.9 according to the statement from HSBC.

Europe also followed the downbeat Chinese data with contraction across the sectors in September. The Composite PMI contracted in September according to the flash estimate at 49.2 with both the manufacturing and services sectors contracting!

The pessimism is evident and the losses are spread across European markets with the STOXX 50 down 4.0% at 2014.79 while the STOXX 600 lost 3.61% at 217.20.

Strong gains are seen for the dollar on the back of the Feds decision that sparked the evident fears. The FOMC said it will buy $400 billion of long-term debt while selling the same amount in short-term securities which to investors was not adequate and had little effect to alter the sentiment which surely kept greenback the winning bet.

The dollar index extended the rally to strike a high of 78.44 and currently trading higher by 0.87% at 78.35 from the opening low of 77.73. The EUR/USD is trading bearishly with the dollar strength and with the downbeat PMI figures as the pair hovers around $1.3461 down 0.81% and recorded so far the high of $1.3600 and the low of $1.3448.

We can also see the heavy volatility for the USD/JPY where the pair reversed to the downside on evident haven demand from earlier gains as the fear of a new BoJ intervention was offset by the selloff seen across the board. The pair is currently trading around 76.40 down 0.04% and recovering from earlier high recorded of 76.97 and off the low set at 76.16.

More volatility is expected for the rest of the day as seemingly the pessimism is here to stay for now and unless a strong new breakthrough is seen, the downside wave will be dominant, as the only relief now will be a breakthrough from Greece to help at least a relief rally!