Forex: EUR/USD drops to 1-week low on surprise Fed taper

on Dec 19, 2013
Updated: Oct 21, 2019

**, Thursday 19 December:**

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The Federal Open Market Committee announced yesterday that the US economy was finally strong enough for the Federal Reserve to start of scaling down its quantitative easing programme. Beginning in January 2014, the US central bank will taper its monthly asset purchases to $75 billion from $85 billon, with the reduction split equally between purchases of mortgage-backed securities and Treasuries.

Following the announcement that surprised the market consensus for a start to tapering some time in 2014, the EUR/USD has turned sharply lower, reaching a one-week low of 1.3648 in today’s Asian session.
In an attempt to supress long-term borrowing costs, the Fed reinforced its forward guidance by adding a ‘soft inflation floor’, without including a lower bound inflation target. The official FOMC statement emphasized, in new language, that it will likely be appropriate to keep the rates on hold “well past the time that the unemployment rate declines below 6.5 percent, especially if projected inflation continues to run below the 2 percent longer-run goal”. Although many Fed-watchers had expected the Committee to lower the jobless rate threshold, policymakers refrained from such an alteration because it would undermine the credibility of the central bank’s forward guidance.

At the post-announcement press conference, outgoing Fed chairman Bernanke said that he anticipates the Committee to trim stimulus at each subsequent meeting by an additional $10 billion. Given the eight FOMC meetings per year, the comment indicates that the central bank currently expects QE to be halted altogether towards the end of 2014. However, Bernanke underlined that each decision will be data-dependent.

Michael Gregory, a deputy chief economist at BMO Capital Markets, writes in a note to clients that “tapering has begun but as Chairman Bernanke noted in his presser, the apparent $10-billion-per-meeting pace could be slowed or picked up.”
The Eurozone Current Account surplus widened in October to €21.8 billion from September’s €14.9 billion. Analysts had actually anticipated the surplus to narrow to €14.2 billion.

The stronger-than-expected release has fuelled a relief rally for the EUR/USD. Right now, the pair is trading around 1.3681, down just 0.04 percent intraday.
The US economic calendar today offers the Unemployment Insurance Initial Claims for last week at 13.30 UTC, followed by the Philly Fed Manufacturing Index for December and November’s Existing Home Sales both at 15.00 UTC.
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