USD Extends Overnight Losses As Markets Surprised By Fed ‘On Hold’ Policy

• USD extends overnight losses in Asian trade as markets somewhat surprised by Fed ‘on hold’ policy
• Gold extends gains after break of $1682 resistance on prospects of prolonged cheap funding
• EURUSD slips back in early trade as it fails to break Asian high in early morning trade.
• EURGBP slips in early morning trade as GBPUSD outperforms
• EURCHF slips back as talk resurfaces on barrier option at 1.2050

Good morning. Well the dollar was in the driving seat for most of the day yesterday, or rather the EURUSD was under pressure as it failed yet again to break above 1.3050 on a sustained basis.

However the US FOMC spoilt the party for the dollar after the European close by announcing that they would not be raising rates until at least the end of 2014. The news really caught the markets by surprise as I can see from the prior chart configuration, particularly on the USD Index that was unfolding.

The headlines from the Fed were clear, but in truth it’s really not as simple or as clear cut as it may appear.

The voting on the FOMC in this regard was not unanimous and this current stance could easily be reversed. However, given the short term surprise understandably the dollar fell immediately the news hit the wires.

Standing back somewhat and looking exactly at what the Fed has said overnight, I am unsurprised by their comments.

Given the backdrop of what is going on in the world at the moment, particularly the crisis in Europe, which Bernanke later referred to as one of the reasons why the Fed has remained on hold for some time to come, it would have been rather irresponsible for them to quash any good news with a more hawkish stance.

The Fed simply has little choice but to build on the recent confidence and good numbers we are seeing emerge from the US by encouraging more growth and employment coupled with the prospect of continued cheap mortgage funding.

The steepness of the US yield curve is clearly a concern when a lot of the US mortgage funding is based on very long term rates. These comments yesterday were clearly designed to try and take the heat out of that curve.

The short term effect has seen the dollar fall and Gold shoot higher. The prospect of low US rates is clearly a determining factor for Gold and once the trend line at $1782 went the rush yesterday evening was quite rapid as many shorts were stopped out as the price ran through that important resistance level.

The EURUSD rose too but the move wasn’t as straight forward as it should and the acceleration through the 1.3050-60 level only came after a great deal of haggling, but momentum did build once the price broke above the years previous high at 1.3075.

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However later it fell back to 1.3044 after trading above 1.31 just to endorse how thin and sporadic the price action was yesterday evening.

The move overnight has seen some acceleration to around 1.3135 ahead of the London opening, but once again the Asian range has been curtailed. USDCHF also traded under its next Fibonacci support at 0.9203.

There is a chance of a pullback to the London gap at 1.3075 but after that, as long as we stay above the 1.3050 region I would expect a move now to test the really big levels that I have already identified to you.

This is exactly the test I thought it might be. The fact that the market appears to have changed its sentiment all of a sudden to a pro EUR, anti USD stance is always a test of one’s resolve.

I am a little nervous about it myself if I am truthful but I have to remind myself that the move lower in the EURUSD from 1.42 had little to do with the dollar and more to do with the European crisis.

The fact that the numbers that later emerged out of the US towards the back end of last year were much improved was just a fillip to the move

The EURCHF has failed again to hold its break above 1.21 and the price has fallen back again this morning despite the higher EURUSD as the USDCHF outperforms to the downside. There is however talk once again that there is an SNB led barrier at 1.2050.

The European markets yesterday were deteriorating once again as the impasse on the Greek PSI soldiers on. The Greek bond yields blew out again as a result and somewhat more worrying was the move in Portuguese debt which is heading once again in to default territory.

That is one reason why the EURUSD was under such pressure again for most of the day yesterday.

Whilst that hasn’t gone away the Fed comments have clearly stolen the short term limelight and that has helped force more long term EURUSD shorts out of the market by the move up last night.

Once again the real question is how much more of this is there to come?

Finally one thing to note is, comments from German chancellor, Angela Merkel in an article in the Guardian today, saying that she doubts whether Greece will survive a default really surprises me.

If she really thinks that then why on earth has she thrown so much German tax payer money at them? Political expediency I guess. Well whatever the reason apart from that I think it’s a remark that may come back to haunt her in the months to come.