Ben Bernanke chaired his last Federal Open Market Committee or FOMC meeting during a two day session which started Tuesday and ended Wednesday with an announcement which most likely surprised most forex traders as expectations called for the US Federal Reserve to leave the current stimulus in place.
Yesterday’s FOMC announcement was the most anticipated one in 2013 as plenty of talk has been circling the forex market as well as any other financial market. Plenty of traders stood on the sidelines going into the announcement. The US Dollar witnessed the biggest increase in volatile trading on solid volume as the reduction in stimulus directly impacts the US Dollar.
How much did the US Federal Reserve taper?
The total amount of stimulus reduction was $10 billion per month which leaves the current stimulus at $75 billion per month divided as seen below:
$35 billion of mortgage backed securities purchases
$40 billion of treasury purchases
It is very important that every forex trader understand that the US Federal Reserve will continue to print US Dollars and spend them on MBA’s and Treasuries. The US Fed will continue to increase its balance sheet and therefore it is long-term bearish news for the US Dollar at least throughout 2014.
Short-term the reduction has caused a rally in the US Dollar which can be seen in major currency crosses, but the overall USD theme remains bearish and forex traders should be aware of a continuation of the weak USD policy favored by the Federal Reserve in the US. The short-term bullishness could be viewed as a great trading opportunity to enter short positions on longer time-frames.
The most bearish news for the US Dollar came in the form of a pledge to keep interest rates near 0.00% for a much longer than anticipated time and after the unemployment drops, if ever, below the 6.5% mark which was previously communicated to the markets by the Fed. Traders have obsessed over the unemployment rate for over one-and-a-half years now and the FOMC announcement yesterday shifted the focus to inflation data.
Given that economies like the UK and Australia are much closer to a rate increase than the US will put additional pressures on the US Dollar and forex traders need to be looking forward to inflation reports more than they have before as it will dictate further reductions and potential increases in stimulus out of the US.
The US Fed has confirmed that it has grown more dovish than before which means they will have very accommodative monetary policy and the incoming Fed Chairwoman Yellen is not only considered extremely dovish in Fed circles, but also supported the reduction in stimulus announced yesterday. The US Dollar is likely to experience an increase in volatility in 2014 with an overall bearish bias.