Market Analytics

The Federal Reserve predicted low interest rates until the end of 2014. The Federal Open Market Committee set formal inflation target at 2%.

US central bank claimed that its growth estimate in the coming quarters worsened from “moderate” to “modest”. The Fed’s Chairman Ben Bernanke indicated that another round of quantitative easing remains as option saying that the Fed is “prepared to take further steps in that [easing] direction if we see that the recovery is faltering or if inflation is not moving toward target.” As inflation forecast for 2014 is at 1.6-2% – below the target – the FOMC can easily justify more easing.

At the same time, it’s necessary to note that there are some deep divisions within the central bank: 3 out of 17 FOMC officials would like to raise rates this year, and 3 more in 2013, while 2 think the first rise should not come until 2016. Bernanke, however, tried to persuade investors that the date in the FOMC statement is more important and that the committee’s approach will prevail over individual forecasts.

Deutsche Bank: “While the Fed’s characterization of the economy in the statement has not changed very much, the comment that conditions are likely to warrant exceptionally low levels for the funds rate ‘at least through late 2014’ is on the surface a major difference from the mid-2013 date given in the last statement.”

Citigroup: “In the long and medium term this is all second order. But in the short term, it's more complicated. Investors will want to know what the meaning of "extended" is when Fed officials talk about keeping rates low for an extended period. If they conclude that means 2015 or 2016, it could hurt sentiment.” “Our positioning indicators show short euro position mainly against US dollar rather than on the crosses.  That means the greenback is vulnerable. Also investors have discussed euro to death, but have been giving the greenback an easy ride. If they start to worry, American currency could be in for a rough ride in the immediate aftermath of FOMC, even if the long-term implications are limited.”

Mizuho: “The Fed’s pledge for a prolonged easing of monetary policy boosted risk-on sentiment. Dollar selling is likely to continue across the board.”

Chart. Daily EUR/USD