Following one of the most highly anticipated events in the economic calendar the Federal Reserve presented a gloomy outlook for the US economy in its post meeting statement yesterday, saying that the pace of economic recovery is likely to be more modest in the near term than had been anticipated.

Committee members went on to say as a number of factors including high unemployment and a depressed housing market weighed on activity over the last few months and announced fresh steps aimed at supporting recovery, saying that it would use cash from maturing mortgage bonds to buy more government debt.
What this represents for the biggest consumer market in the world is a clear shift in policy within its central bank, which until recently had been looking to exit from the extraordinary monetary stimulus delivered during the financial crisis.

Following the announcement market participants took profit towards 1.5860 before a taking short positions against GBP/USD which currently trades at 1.5685 – almost 200 pips lower following the announcement, the pair may see recovery back towards the key 61.8 Fibonacci retracement level (from the August downward trend) if investors see reason to go ‘long’ against the Dollar which is unlikely unless we see risk appetite back in the market. What this represents is a shift in risk aversion in the financial markets and a clear bias towards the US Dollar as a safe heaven currency which caused stock markets to tumble overnight. Unless we see an element of risk appetite back in the markets equities will likely to retrace also.

As we I have pointed out in past, the USD holds a strong ‘adverse’ correlation to growth linked benchmarks like Bond Yields and the S&P 500 – and interestingly “Cable” (GBP/USD) which currently holds a 71% correlation to the MSCI (World stock index), this is interesting when tracking price movement when the market becomes risk adverse and could be used as a good strategy when hedging against your exposure.

Looking at Sterling price movement today against its counterparts, sentiment remains mixed following the release of the Quarterly Inflation report released this morning. The BoE forecasts economic activity to expand at an annualized pace of 3% over the next two years and sees inflation falling back below 2% around 2012 which caused considerable volatility after the release. With losses against the safe heaven US Dollar but at least a point gained against the Euro which currently tests 1.2100 (Interbank), the market is likely to see increased volatility as we head into late morning trade in the US. Against both the AUD / NZD and CAD the market still remains within its tight ranges with little signs of a breakout to the upside after recent bullish forecasts.

The Australian Dollar is likely to remain volatile going into the Asian session with today’s release of the Australian Westpac Consumer Sentiment survey and Chinese economic data in the form of CPI, PPI, Retail Sales and Industrial Production – all key indicators of performance for the Asian, Australasian and Global markets.

If you have a requirement buying into any of the 16 most actively traded currencies do not hesitate to contact me on my direct line +0044 1736 335264 or email me at tom.trevorrow@torfx.com

Tom Trevorrow

Senior Trader

+0044 1736 335264

tom.trevorrow@torfx.com