Financial markets drifted away in the last couple of weeks, and many market participants pointed to the Fed’s meeting that just ended yesterday. The stock market indices hovered close to the highs before the FOMC Statement, despite some selloff that was quickly bought right before the Fed’s message was out.
One may say that this is typical price action ahead of important Fed meetings. Indeed, it is casual for the market to drift away, especially considering what was at stake yesterday – a hawkish message from the Fed?
What Did the Fed Signal?
If the Fed signaled anything, it wasn’t hawkish. Fed’s Powell reiterated the fact that despite some improvements, the real unemployment rate is closer to ten percent. Hence, more needs to be done.
As such, the Fed kept the benchmark interest rate unchanged, meaning that the target range stands at 0.00% – 0.25%. Also, it kept the interest rate on excess reserves unchanged at 0.1% while the Quantitative Easing program continues within the same parameters.
In other words, as expected, in terms of the FOMC Statement. Unfortunately, not even the press conference brought more clarity into what the Fed’s intentions are in the near to medium future. Instead, many questions focused around what happened recently on Wall Street, with the retail traders acting in unison to punish short-selling hedge funds. Naturally, the Fed cannot comment on such speculation, as speculation is as old as the stock market is.
For the currency market, the Fed’s message, as unclear as it was, it brought some sharp moves in commodity currencies. Because the Dow Jones lost several hundred points, the AUDUSD pair, the one that is very tight correlated to the index, dropped as well. It does not mean that other USD pairs followed because some, such as the EURUSD, actually traded with a bid tone. For whatever the reason, investors keep bidding for the Euro, as seen by the price action in January.
Despite dropping from 1.23 at the start of the year to 1.2050, the EURUSD moves to the downside were followed by at least a 61.8% retracement. Yes, the pair came back subsequently and made a new lower low, but the fact that it manages to climb out of every dip suggests strong buying on any correction.
All in all, nothing to take away from the Fed except that the recovery is uncertain and the situation requires no changes in the monetary policy as of yet. The focus now turns to the stock market (again) and what the end of the trading month brings.