By GCI Forex Research
Fundamental Outlook at 0800 GMT (EDT + 0400)
USD
For a long time markets had been eagerly awaiting the decision and now the Fed has taken position. Last night it announced that the Fed will purchase $600 billion of Treasuries until end of Q2/2011. Together with the reinvestment of swiftly maturing assets (mainly due to prepayments on mortgages) the total volume of bond purchases may reach $900 billion over that period. And the Fed even did not proclaim that this number is a hard ceiling. Instead, the US central bankers will adjust the volume of asset purchases according to newly available data.
EUR-USD started a roller-coaster ride after the announcement, but in the end the USD came under pressure. And not without reason, even though the Fed had initially announced a volume which was relatively close to the (in this instance difficult to measure) market expectations. The Fed’s announcement that the volume and speed of the purchasing programme will be adjusted if necessary to reach the two targets of price stability and maximum employment might soon turn out to be a bottomless pit. The Fed is likely to finally banish any fears about deflation. But it is far from certain whether further bond purchases will help a recovery of the US economy. So far Ben Bernanke has failed to provide an explanation of how further bond purchases are going to support the economy. Even if the Fed’s measures will hold yields down, yields have been at low levels for quite some time so that it is questionable if the purchases will lead to additional investments. Also the large supply on the housing market is unlikely to be reduced by these measures. Consumer sentiment is therefore expected to remain subdued.
But what is the Fed going to do once it becomes obvious that the economy (which is not in recession but is on a growth path slightly below potential) does not gain momentum and unemployment remains high? Following today’s announcement the Fed would then have to open the flood gates even further. The announcement gives the markets little reason to assume that the Fed would not implement this plan. As a result things are likely to become increasingly uncomfortable for USD and it only seems a matter of time until EUR-USD breaches its recent high at 1.42.
EUR
Nobody expects the ECB to change key rates today or to announce further details about an exit from its unconventional monetary policy. It can nonetheless not be excluded that the EUR will benefit from the subsequent press conference. Compared with the Fed the ECB will once again present itself as a central bank with an eye for the important issues long term. That is not reviving the economy short term but guaranteeing price level stability long term. Admittedly also the ECB decided to buy bonds, and what is worse those of struggling Eurozone members. But there is no doubt that the ECB will end this programme in the foreseeable future, while the Fed still has the foot on the accelerator. In view of this discrepancy EUR-USD might rise further this afternoon
GBP
Another UK data publication surprised on the upside yesterday. Contrary to expectations the PMI for the service sector rose slightly to 53.2 in October. Against the background of better economic data over the past few days it is unlikely that the Bank of England will announce an extension of the asset purchases at today’s meeting. It will however be interesting to see whether the trend towards QE among the members has increased. We will however have to wait for the inflation report next Wednesday as well as the central bank’s meeting minutes the following week for any indications on this issue.
TECHNICAL OUTLOOK
EURUSD BULLISH Rise through 1.4159 triggers another bullish run towards 1.4373. Support is at 1.392.
USDJPY BEARISH Little support below 79.75 till 77.91. Resistance at 81.99
GBPUSD BULLISH Break of 1.6107 has exposed 1.6276 and 1.6458 next. Support comes in at 1.5957.
USDCHF NEUTRAL Breach of 0.9703 exposes 0.9463. Upside capped at 0.9972
AUDUSD BULLISH Momentum is positive; next resistance at 1.0222, measured target. Support at 0.9891 ahead of 0.9542 reaction low.
USDCAD BEARISH Outlook is bearish; the pair targets 0.9981 with scope for 0.9820. Resistance at 1.0156.
EURCHF BULLISH Targets 1.3924 with scope for 1.4041 next. Near-term support at 1.3540
EURGBP NEUTRAL 0.8942 and 0.8652 mark the near-term directional triggers.
EURJPY BULLISH Clearance of 115.68 would expose 116.68 and 119.33 next. Support comes in at 110.66
Forex Daily Market Commentary provided by GCI Financial Ltd.
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Four sessions ago, a vain breach of the resistance 80.42 occurred. However, the following 3 sessions, also uptrend oriented, were quite weak relative to the previous ones. This point describes a weakening of the bulls relatives to the bears.
The required configuration should appear when the support of 80.9 will be crossed downward. Following is one way to catch the trade:
Daily graph: 
