The Fed knocked the US dollar for six, rallied stocks and saved the Aussie from breaking 92 cents.

May 22, 2014

So the Fed is struggling to figure out what to do with monetary policy in the US.

That much is obvious in the differing views being expressed in public by Fed officials this week. Last night it was the turn of Kansas City Fed President Esther George who said that the longer rates remain low the bigger the risk when rates do begin to normalise.

But the markets didn’t care because even though the Fed minutes seemed to echo George’s comments noting that the FOMC is still grappling with the how of its exit from super accommodating monetary policy as well as the when the minutes showed also that the Fed remains untroubled by inflation and that it is not affecting the goal of driving employment.

This implied that the Fed would be, or at least could be, more cautious and take more time in moving from the taper to higher rates. This emboldened stock bulls but hit the US dollar a little which had been doing well prior.

Indeed the 4 hour charts show clearly the impact on the Aussie dollar of the Fed minutes as the US dollar reversed course. Key on the day is resistance at 0.9269 and then 0.9293. The daily charts have an encouraging candle for the bulls but a break through 0.9307 would be needed to turn the outlook.

Turning to stocks at the close the Dow was 0.97% higher with a rise of 159 points to 16,533. The Nasdaq rose 0.86% to 4,132 while the S&P 500 more than doubled yesterdays drop rising 15 points for a gain of 0.81% to 1,888. The range trading continues.

In Europe the FTSE was up 0.28% to 6,821, the DAX rose 0.61% to 9,698 while the CAC rose 0.37% to 4,469. In Milan and Madrid their high beta status ensured bigger rises and they printed 1.07% and 0.74% respectively.

– The above has left the ASX Futures up 23 points overnight with the SPI 200 June contract sitting this morning at 5457. The recovery in iron ore overnight which saw rises of around $1.50 tonne in futures markets overnight will also help the local market today.

Looking at currencies then as noted above the Aussie dollar has staged a pretty solid recovery from a low of 0.9205 and is back around 0.9250 at the moment. The Euro came back from a low of 1.3634 and has rallied 50 points to 1.687, Sterling ripped higher on the back of strong retail sales which rose 1.3% in April against 0.5% expected and the Pound sits at 1.6899 this morning. USDJPY had an incredible move which the day on day change of just 0.7% completely masks. At one point last night USDJPY sat at 100.80 before rallying back to sit at 101.38 this morning.

The Euro found support at the 200 day moving average at its first touch since the aborted break back in September 2013.  This is an important level and a break would signal a move to the 2014 lows at 1.3476.

Watch 1.3620.

Commodity markets suggest that the $1.39 a litre I paid for petrol yesterday won’t last with June Nymex crude up $1.52 to $103.85. Gold is down $6.50 to $1,287 and Silver is largely unchanged at $19.30. Copper fell 3 cents a pound to $3.13. On the Ags corn hardly moved, wheat fell 0.93% while soybeans ripped 2.33% higher.

Today on the data front we get Australian consumer inflation expectation, HSBC Manufacturing PMI, Japanese BoJ Economic survey and then tonight a raft of European and the US flash PMI’s. Also out and of great import is UK Q1 GDP before retail sales, existing home sales, jobless claims and Kansas Fed survey in the US.

Greg McKenna

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