Forex - Fed Stays Ultra Loose onto BoE & ECB

Forex News and Events: As we expected yesterday, the Fed was unwilling to end the liquidity-fueled party just yet and that’s just what happened. The FOMC members voted unanimously at the meeting to hold rates steady and indicated its ultra loose monetary policy would remain "excessively low" for “an extended period.” The recent sell-off in risk correlated trades has been driven primarily by the worries that the Fed would subtly signal a timetable for its exit strategy. We doubt that with the recovery still fragile and extended weakness in the US labor markets (reinforced by yesterdays ADP and ISM data) that the Fed would risk prematurely popping any asset bubble. The initial price reaction was one of uncertainty as the central bank also reduced the target agency debt purchases from $200bn to $175bn. Participants seemed to be confused whether this was the exit signal they were searching for. However within the accompanying statement was a clear & rational explanation that a lack of demand was simply the culprit. EURUSD initially chopped between 1.4830 – 1.4860 before climbing to 1.4900 as traders came to the realization that liquidity would stay plentiful and risk correlated assets were back in play. In the Asian session we have seen a slight reversal of risk taking as the USD clawed back gains and equity markets were broadly lower. Now the markets’ attention turns to the BoE and ECB. We expect the central bank will hold rates and at the often hyped ECB press conference, Trichet will stick to the company line (that it’s currently premature to implement an exist strategy). Overall we believe the ECB meeting will be a non-event and energy would be better spent monitoring the BoE rate decision. The BoE meeting has provided participants with a much greater quandary; the first issue is the massive disconnect between UK GDP and PMI survey. Usually a reliable indicator of domestic economic activity, PMI data currently has the UK performing relatively well (or at least better then the Eurozone) and definitely better then the -5.2 y/y GDP implies. In addition, PMI is used by the MPC to forecast short term economic performance. So the second question will be how much weight members will place on which economic data in deciding on QE expansion (GDP vs. PMI). We are aligned with the market in expecting a £25bn expansion; however there are some who are calling for £50bn. While generally, the sterling has fallen before the announcement of QE, we expect £25bn to have been already priced-in, while anything higher should lead to GBP weakness. Earlier Swiss CPI printed lower then expected at y/y -0.8% vs. 0.7% exp. With the SNBs Jordan recently reiterating that inflation would define the bank’s exit strategy, we would expect the SNB to stick with its FX intervention policy. EURCHF below 1.5100 creates buying opportunities.

Today's Key Issues (time in GMT): 00:00 GBP CZK CNB rate announcement Nov 1.25% exp 09:30 GBP Industrial production, % m/m (y/y) Sep 1.3 (-10.2) exp, -2.5 (-11.2) prior 09:30 EUR Manufacturing output, % m/m (y/y) Sep 1.0 (-9.9) exp, -1.9 (-11.3) prior 10:00 GBP Retail sales, % m/m (y/y) Sep 0.4 exp, -0.2 (-2.4) prior 12:00 EUR BoE MPC Bank Rate decision, % Nov 0.50% exp, 0.50% prior 12:45 EUR ECB rate announcement, % Oct 1.00 % exp, 1.00% prior 13:30 USD ECB press conference 13:30 USD Initial jobless claims, thous 530 (526) prior 13:30 USD Non-farm productivity 6.0 (3.4) exp, 6.6 (1.9) prior 13:30 Unit labour costs, -3.2 (-3.1) exp, -5.9 (-1.2) prior

The Risk Today: EurUsd The pair saw some whipsaw action yesterday evening as the Fed made the same statement of low rates for an extended period and the USD sold off rather aggressively only to see 1.4905 resistance provide a cap. The downtrend is still fully intact and only a 4 hour close above 1.4950 should be considered otherwise. Today’s test will be to see if the 12 month uptrend line at 1.4780 offers any support and if it does then we have a nice triangle to play between that level and 1.4900. GbpUsd 1.6600 continues to cap the pair with yesterday’s attempt met with heavy supply at 1.6597. Short term it is fairly sideways rangebound action but with a Bank of England meeting at midday we can safely expect that to change this afternoon. The pair must stay below 1.6663 to maintain the long term downtrend and penetration of 1.6272 remains vital for the bears. Anything outside of this scenario will need to be taken back to the drawing board. UsdJpy Yesterday we spoke of short interest in the pair at 90.90 and after printing an hourly shooting star at 90.86, confirmation was in place for a near perfect short entry. The pair is selling off at time of writing into the 90.00/10 region with minor support slightly below at 89.85. Below there 89.30 provides support in the form of a new trend channel that has formed over the last month so the risk reward at that level favours the long side. A break there and we are looking at 88.60 for major support UsdChf Yesterday we were looking at playing the 3 week uptrend by getting long at 1.0186 with tight stops. As you can see below the pair didn’t even take a breather at that level and as the stops got triggered the pair fell to 1.0132 support in one hour. This morning the pair is retesting the underside of the uptrend back up at 1.0186 where there is also minor resistance. Intraday players may well look at the opposite trade this morning by shorting at 1.0186 with stops just above 1.0220 and covering at 1.0132

Resistance and Support: EURUSD GBPUSD USDJPY USDCHF 1.5020 1.6742 93.50 1.0460 1.4967 1.6605 92.50 1.0360 1.4860 1.6560 91.60 1.0290 1.4844 1.6546 90.20 1.0174 1.4626 1.6400 89.60 1.0150 1.4580 1.6260 89.20 1.0123 1.4480 1.6200 88.85 1.0037 S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot