Morning Fundamentals: FOMC Maintains Fed's Program, Euro Shows Strength

The latest Federal Open Market Committee meeting has voted to maintain the Federal Reserves current programme of purchasing securities at a rate of $85 billion a month. The minutes indicated that there had been a recent slowdown in economic activity due to temporary factor such as weather while it said that “household spending and business fixed investment advanced and the housing sector has shown further improvement.” The central bank indicated that its policy of purchasing assets will continue unless the outlook for the labour market improves substantially. It did not alter its statement in relation to holding interest rates at near zero for as long as inflations remains below 2.5% and unemployment stays above 6.5%.

Meanwhile the European common currency shows strength despite an expected increase in unemployment in the 17 nation euro zone for the fifth consecutive months. Consensus expectation is for an increase to a record 11.9% with unemployment in Spain expected to rise above a staggering 26%. Whilst the European financial markets have settled significantly over the past 6 months, the real economy continues to struggle with the ECB predicting that the euro zone economy will shrink by 0.3% this year. The euro continues its miraculous rise without any apparent impetus as the currency continues to trade on a technical basis and momentum higher is maintained. It opens the morning at 1.3575.

U.S. equity markets fluctuated as investors awaited the latest minutes of the FOMC and the gross domestic product unex-pectedly dropped by 0.1% annual rate in fourth quarter. Nine out of the ten industry groups in the S&P 500 recorded falls as the index closed 0.39% lower at 1,502. 75% of S&P companies that have released results so far have exceeded quarterly profit projections. Investors are now awaiting the all important employment data out of the U.S. that will be released in tomorrow's overnight session.

Commodity prices gained strongly with the major indexes such as the UBS Bloomberg CMCI rising more than 1%. WTI crude continues to rise gaining 0.5% to above $98.00 even as the U.S. economy unexpectedly shrank in the December quar-ter. Precious metals rose with gold up by 0.9% to $1,676 while silver surged 2.7% to above $32.00. Agricultural commodities were mostly higher with strong performances from soybean and sugar. Copper rose 1.6%.


EUR/USD traded the Asia session like it had bees on it with the price hardly moving with expectations mixed despite the price being at 12 month highs. It wasn’t until the European morning that the price started to see some movement with the trend of the previous week or two winning out. Despite weaker Spanish GDP and mixed Bond Auctions for both Italy and Germany. The blast through 1.3500 took the pair to an initial 1.3560 top around the time of the better than expected US ADP Employment numbers which lifted the risk sentiment across most markets. From there the price remained buoyed reaching 1.3585 despite a mixed US GDP number later in the morning. Euro is now closing at 14 month highs with the next major hurdle 1.3600 within reach. Can this buoyant run continue for the Euro with economists calling for the death of the Euro recently and now it looks like the majorly favoured currencies in the global markets.

Compass Direction
Short-Term Medium-Term
NEUTRAL NEUTRAL

AUD/USD could not hold onto the gains of the previous session despite the calls from bulls about following the Euro higher. Offers from cross selling of funds that have been stored in the high yielding AUD continues to hamper any longer lasting drive higher. So in the end the pair fell during the European morning from 1.0465 to a US session low of 1.0400. Kiwi followed the path leading into their rate decision morning, which was just released with no change at 2.50%. Small pullbacks have been attempted but the previous support at 1.0435 is now resistance and doing its job. We close the session now with the price at 1.0406 with eyes on a crack of 1.0400 and bigger targeted 1.0380. A possible break below 1.0380 opens the door to a stop hunt which could see the price towards 1.0310 with little resistance as recent bulls bailout and this outflow of AUD into the other majors could build momentum. Longer term the outflows might continue as PM Gillard has called for an election on the 14th September!

Compass Direction
Short-Term Medium-Term
BEARISH NEUTRAL