With the Federal Reserve FOMC meeting out of the way, attention on financial markets was back on macroeconomic data as the guessing games begin once again. In a surprise decision, the Fed decided to stay put and not alter the pace of its asset purchases programme. Last week, the FOMC announced that it would continue buying $85 billion per month in assets, more specifically $40 billion in mortgage-backed securities and $45 billion in Treasury debt.

This decision came as a huge surprise as investors were expecting a $5 to $10 billion taper from its record stimulus by the Fed. Despite the committee recognising the improvement in economic activity and labour market conditions, it was apparently not enough to convince policymakers to carry out what was elaborately “hinted”. A slight easing in job growth, evidenced in last month’s non-farm payroll report, together with a rise in mortgage rates was enough to sway away from a decision to scale back monetary easing.

The Fed, in its policy statement ,replaced the phrase “prepared to increase or reduce the pace of its purchases” and instead focused on the conditions under which it will taper, signalling its intent to reduce the pace of its bond-buying programme eventually. But the surprise “no action” once again highlighted the fact that chairman Ben Bernanke wants to stay easy. This raised a lot of questions as markets may well perceive this latest stance by the Fed as a signal that the quantitative easing programme will continue at current levels, at least till the conclusion of Bernanke’s term next January.

At the start of this week the rally in riskier assets, which shot up soon after the Fed’s announcement, eased somewhat. Wall Street shares slipped after touching historical highs last week and Asian stocks fell despite upbeat data from China at the start of the week. Riskier and commodity-linked currencies also retreated after posting sharp rallies last week.

The euro stalled from a seven-and-a-half month peak against the dollar, as the greenback bounced back from its seven-month trough against a basket of major currencies. EUR/USD traded lower to 1.3464 on Tuesday, edging further away from its peak by 1.3569, despite Chancellor Angela Merkel’s landslide election victory over the weekend. Merkel secured a third term in the largest victory for the Conservative Party in more than two decades, but fell just short of the votes required to rule on their own. The single currency failed to follow through on its initial gains after the German poll results, mostly due to the fact the outcome was widely expected and that Merkel still needs to forma coalition.

The single currency was also weighed by a key business sentiment indicator for Germany which fell short of expectations. The Ifo business climate index rose to 107.7 against consensus for 108. Comments by European Central Bank president Mario Draghi also put pressure on the common currency. Draghi said he was prepared to inject more cash into the banking sector to aid the economy.

World shares and risk sentiment in general were however mostly weighed by anxiety over fiscal issues in the US and not just monetary policy. Investors are worried amid a potential political face-off in Washington over the debt ceiling that could lead to a shutdown of the government or even default on its debt.

Looking ahead, apart from key macroeconomic data such as the jobs report from the US on the first Friday of the coming month, investors will be watching carefully any developments from Congress, as without a deal, America is expected to run out of cash towards the end of October and markets will be expected to price in any potential mishaps as the date approaches.

After a steep sell-off following the FOMC decision, the Japanese yen pared most of its losses as forex investors booked profits after the sharp risk rally amid an overall assessment by analysts and traders alike on whether the Fed will go ahead with its tapering outlook. USD/JPY hit 99.67 in its post FOMC rally but retraced to 98.51 at the time of writing, while EUR/JPY retreated to 132.80 from a four-year peak by 134.95.

The British pound tumbled on Tuesday after it hovered just above 1.60 against the dollar but failed to gather traction. GBP/USD fell apart following downbeat data from Britain which showed loans for house purchases missed expectations in August. The pair fell to 1.5955 while EUR/GBP bounced back to 0.8459. GDP data from the UK today will give a key insight on the health of the economy in light of recent improving economic conditions.

Visit RTFX for additional forex news and demo trading account information.

Upcoming FX key events:
Today: UK GDP, US GDP & US pending home sales.
Tomorrow: EZ business climate index, German CPI, US personal spending & US Michigan consumer sentiment.

Technical key points:
EUR/USD is bullish, target 1.3700, key reversal point 1.3300. EUR/GBP is neutral. USD/JPY is bullish, target 105.60, key reversal point 92.50. GBP/USD is neutral. USD/CHF is neutral. AUD/USD is neutral. NZD/USD is neutral.

RTFX Ltd is licensed to conduct investment services business by the MFSA. This information does not constitute advice, should not be relied on as such to enter into a transaction or for any investment decision and is provided for information purposes only.

www.rtfx.com

Emman Xuereb is a trader at RTFX Ltd.

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