The U.S. Dollar fell sharply lower versus the Euro and the Japanese Yen Tuesday afternoon after the Federal Open Market Committee hinted that it stood ready to provide stimuli for the U.S. economy. The suggestion of additional quantitative easing conjured up images of the Fed firing up the Treasury printing press, thereby weakening the Dollar.
The FOMC statement suggested that the Federal Reserve may be preparing to provide more stimuli, most likely at its next meeting in November. This news confirmed what investors were looking for prior to the decision. The Fed cited the main reasons for considering additional stimulus were rising unemployment and falling prices. Today’s Fed statement brought up concerns about deflation for the first time since its loose monetary policy began.
In addition to the soft nature of the Fed’s monetary policy decision, favorable debt auctions in Spain and Ireland lit the initial fire in the EUR USD on Tuesday morning.
The stronger Euro reflected the growing sentiment that the Euro Zone economy is recovering faster than the U.S. economy. The hint at an increase in QE by the Fed is a strong indication that the FOMC believes the same. Furthermore, additional QE will keep pressure on U.S. interest rates, while a faster recovery in Europe will bring that economy closer to an interest rate hike. Investors will look to invest in the higher yielding currency.
Technically, after hovering near last week’s high at 1.3159 earlier in the session, the EUR USD moved sharply higher after the Fed hinted at additional easing. The strong close has put the Euro in a position to test the early August high at 1.3334. An uptrending Gann angle at 1.3244 is providing guidance at this time.
The Fed’s hinting at further quantitative easing helped drive the USD JPY lower. Today’s lower-low formation formed a new swing top at 85.93 and gave the first indication since last week’s intervention that the market has most likely absorbed the $17 billion of Yen selling pressure. A new main range has been formed between 82.88 and 85.93. This makes the retracement zone at 84.40 to 84.04 the next likely downside target.
Many traders were surprised the 85.00 level was breached so easily this afternoon. Some believed that this would be the ideal price for the Bank of Japan to defend. Once traders saw that there was no sign of central bank activity, the Dollar/Yen became easier to sell.
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