Dollar Plummets, Stocks Surge as Fed Extend Low Rate Pledge to Late 2014

Dollar tumbles broadly and stock soars after Fed pledged to keep rates low until late 2014. That’s firstly much later than prior indication to keep rates low until mid-2013 at least. Secondly, it’s even later than what most analysts thought, that is late 2013 or early 2014. Fed held rates unchanged at 0-0.25% as widely expected . In the accompanying statement Fed said that while there were some improvements in labor market conditions, unemployment rate “remains elevated”. Also, “growth in business fixed investment has slowed” and housing remains “depressed. Fed expects growth in the coming quarters to be modest” and unemployment rate will only decline “gradually. There are also downside risks to growth from strains in global finance markets. Meanwhile, inflation is subdued with long term expectations stable. Regarding the quantitative easing program, Fed said it would continue the operation twist to extend the maturity of the $2.6T portfolio. Also, it will continue to reinvest in agency mortgage-backed securities

Fed also updated its economic projections. In short, central tendency of GDP projection for 2012 and 2013 are lowered. Unemployment rate projection for 2012, 2013, 2014 were lowered. Headline inflation forecasts was largely unchanged from November’s figures. Meanwhile, core inflation projection projections was largely unchanged too. The numbers can be found below.

Dollar is seen sharply lower after Fed’s release with EUR/USD breaking 1.3062 resistance, GBP/USD breaking 1.5627, USD/JPY failed to break through 78.28 resistance and retreats sharply. Gold jumps sharply and breaches 1700 level . Dollar index’s sharp fall and break of 79.51 support firstly confirm short term topping. Secondly it’s affirming the case that whole recovery from 72.69 is finished at 81.78, after missing 100% projection of 72.69 to 79.84 from 74.72 at 81.86, on bearish divergence condition in 4 hours MACD. Nonetheless, we’re still prefer to see sustained trading below 79.51 support to confirm. In that case, the index should target 74.72 support next. However, break of 80.43 minor resistance will mix up the near term outlook and turn bias neutral first.

DOW reversed intraday loss after FOMC announcement and is back pressing this week’s high of 12764. Near term outlook remains bullish with 12311 support intact, and we’d stay bullish in DOW for last year’s high of 12876. Also, we’re still favoring the case that whole up trend from 2009 low of 6469.9 is set to resume for 61.8% projection of 6469.9 to 12876 from 1404.49 at 14363.43.

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