The decision by the Fed to extend its maturity extension program through year end by USD 267 billion left markets with a taste of disappointment. Although the Fed noted that it was “prepared to take further action” it was clear that FOMC members were resistant to such action at this point in time. Nonetheless, any downside to risk assets was limited by the potential for more quantitative easing (QE) somewhere down the line.
Indeed, while equity markets took a softer tone it was notable that the VIX ‘fear gauge’ continued to drop reflecting an improvement in risk sentiment. The VIX has dropped by 35% from its high at the beginning of the month. Commodity prices remained under downward pressure, however. The lack of further Fed balance expansion capped gold prices too. The outcome is likely to play positively for the USD given that the Fed is not going to debase the currency any further for now.
Following the Fed decision clearly pressure is on other central banks to act. The European Central Bank’s Coeure hinted at the prospects a press interview while the Bank of England minutes were surprisingly dovish, indicating a strong likelihood of further UK QE at the next MPC meeting.
EUR/USD dropped to around 1.2638 following the FOMC outcome but rebounded probably helped by the fact that the Fed left open the door for further balance sheet expansion. EUR/USD 1.2750 remains a major barrier to the currency pair but if breached there is plenty of upside potential.
Flash Eurozone purchasing managers indices (PMI) releases today will likely restrain the EUR, with a further slight declines in manufacturing confidence expected, consistent with further contraction in activity. The data will put further pressure on the ECB to cut interest rates. EUR direction today will also come from Spanish and French bond auctions today.
It’s worth highlighting the surprisingly robust New Zealand Q1 GDP data released this morning. The data revealed a strong 1.1% quarterly increase compared to consensus expectations of a 0.4% increase. The data boosted NZD which rallied to a high of 0.8018 versus the USD and remains well supported. NZD/USD 200 day moving average around 0.7952 will provide decent support for the currency especially given the sharp move hawkish move in NZ interest rate markets.