Currency Analyst since 2010

FOMC: consequences for EUR/USD

The Federal Reserve announced a plan to cut monthly bond purchases to $75 billion from $85 billion starting from January. In general, market players regard this decision as a sign that American economy is in good shape since the recent data points at the increase in growth momentum.

It seems that the Fed has learnt its lesson and is now providing better communication: the central bank didn’t make any pledges on the future dynamics of QE and made an effort to underline that it would keep the interest rate low.

EUR/USD took a blow on the Fed and slid nearly 2-year highs around $1.3800. Traders have started speculating whether it’s the start a longer term, taper-inspired downtrend for the single currency. This would be good for the ECB as lower euro would boost exports and help get inflation closer to the central bank’s 2% target, easing deflation fears. However, ING economists point out that Japan’s historic experience of having low interest rates, deflationary pressures, economic stagnation and a strong currency suggest that a weaker euro is not necessarily guaranteed.

Danske Bank and Credit Agricole, on the other hand, expect euro to weaken next year and the difference in the approaches of the Fed and the ECB will play its part. In addition, EUR-supportive transatlantic portfolio flows should reverse in 2014 producing outflows by end-Q1 as a superior US growth profile drives investor outflows from Europe, says CA.

In the near term watch for support at $1.3600. According to Commerzbank, failure here should provoke a return visit to $1.3300/1.3273 (recent low, Fibo and 200-day MA).

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