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USD lower as Fed holds fire

- We believe that the zero interest-rate policy and quantitative easing approach has proven inefficient
- We anticipated a "no hike” scenario but also feel that quantitative easing 4 is not far off
- New expectations will now emerge for October and December as strong belief in dollar will sustain it at its current strong level
- EUR/USD remains firmly set in the uptrend channel, now heading to 1.1561
- AUD/USD is on the rise with closest resistance standing around 0.7250-76, and the next one at $0.74 
- NZD/USD is also moving higher with yesterday’s high of 0.6446 now acting as resistance, while on the downside, the low stands at 0.6312 
- USD/CHF is currently testing the strong support standing at 0.96 as sellers cannot move the price lower
- Despite recent correction in USD/CAD we remain bullish on the pair and believe that the Fed’s inaction will encourage the BoC to cut its benchmark rate before year-end
 
As expected, the Fed left its monetary policy unchanged and reaffirmed the current federal funds rate target range of 0% to 0.25%. The biggest surprise however, came from the tone of the statement. Market participants had already priced in this event but they were not prepared for such a dovish statement. As a result, the US dollar got immediately hammered, with the dollar index dropping 1.20% as the greenback lost ground against almost every single currency. However, commodity currencies such as the AUD, NZD and CAD were unable to hold ground as the dollar bounced back to its initial levels. US treasury yields dropped substantially amid the decision; the 10-year fell 11bps to 2.1830%, the 5-year dropped 14bps to 1.4710%, while the more sensitive 2-year sank to 0.67%, down more than 14bps.
 
***Yann Quelenn, Market Analyst, Swissquote: “The FOMC decided to leave its rates unchanged at 0%-0.25%. Fed Chairwoman Janet Yellen stated that despite the improvement in the labour market, the Fed is still concerned by the fact that inflation sits well-below the longer-run objective of 2%. She added that lingering oil prices and lower import prices added downside pressure to inflation. It was also said that the Federal Reserve will be willing to increase rates once there is (even) further improvement in the labour market and more evidence that inflation will reach the 2% target. Indeed, part-time employment is elevated in the U.S and the wage growth remains subdued.
 
We believe that the zero interest-rate policy and quantitative easing approach has proven inefficient. We predicted that no rate hike would happen as data has been coming in mixed and still believe that quantitative easing 4 is not far off. Yellen added that even if a rate hike happens, monetary policy will remain accommodative. This really shows how worried the Federal Reserve is concerning the sustainability of the so-called U.S recovery. However, it transpires that Fed members have in fact increased their projections for economic growth this year, which is now expected to hit 2.1% this year and 2.3% in 2016.
 
The USD-complex has been weakened after the announcement even if the markets had partially priced in a “no hike”. Nonetheless, new expectations will emerge for October and December and strong beliefs around the world’s first economy are still alive and will sustain the dollar at a strong level.” ***
 
EUR/USD is now trading above the 1.14 threshold and remains firmly set in the uptrend channel. The single currency validated a break of the 1.1368 resistance and is now heading for the following, standing at 1.1561 (high from August 26th).
 
In the Asian session, regional equity markets across the board are trading in positive territory ahead of closing with the exception of Japanese shares, which dropped at opening. Both the Nikkei and the broader Topix index were unable to move into territory during the session; they closed down 1.96% and 1.98%, respectively. Elsewhere in Asia, Hong Kong’s Hang Seng edged higher by 0.23% while Chinese mainland shares were trading without clear direction. The Shanghai is down -0.23% and the Shenzhen Composite edges lower by -0.06%. In Australia, the S&P/ASX 200 index is up 0.46%. AUD/USD is on the rise this morning as the Fed’s decision still weighes on the greenback. The closest resistance, implied by yesterday high and 50dma, stands around 0.7250-76, while the next one can be found around the $0.74 psychological threshold. On the downside, a support lies at 0.7138 (yesterday’s low). NZD/USD is also moving higher this morning. Yesterday’s high at 0.6446 will act as resistance, while on the downside, the low standing at 0.6312 will act as support.
In Europe, equity futures point toward a lower open despite strong gains in Asian markets. The German DAX is down 0.55%, the CAC -0.57%, the Footsie -0.43% and the SMI -0.91%. EUR/CHF is still stuck below the 1.10 threshold, while USD/CHF took a hit yesterday evening dropping 1.25%. The dollar is currently testing the strong support standing at 0.96 as sellers cannot move the price lower.
Today is a slow day for economic news. However, August inflation reports from Canada will be released this afternoon. Core CPI is expected at 2.1%y/y and headline CPI at 1.3%y/y. Despite recent correction in USD/CAD, we remain bullish on the pair as we believe that the Fed’s inaction will encourage the BoC to cut its benchmark rate before the end of the year.

Friday, 18 Sep, 2015 / 8:53

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Source : http://en.swissquote.com/fx/news-and-live-signals/daily-forex-analysis/2015/09/18

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