Markets watched the FOMC announcement yesterday with great anticipation. Only 11% of economic analysts supported tapering at this meeting. Even though analysts including this writer did not expect to see tapering the overall market opinion yesterday and expectation was a $10 billion cut and that is exactly what Mr. Bernanke gave them. Maybe it was a Christmas present. Historically the Fed has not made any changes to its policy in December. With the changeover in leadership next month from Mr. Bernanke to Janet Yellen analysts were expecting Mr. Bernanke to leave things on hold. But never say that Mr. Bernanke did not know how to play to an audience. Instead of going out with a whimper he left with a roar. When the decision was published markets went for a wild ride, even those traders who were hoping for the tapering were surprised. The US dollar soared and then tumbled and then adjusted and corrected and for a while ended up just where it had started close to the 80.20 price. This morning the greenback is now at 80.75 and continuing to climb. The tapering was nice but it was the upward revision in 2014 GDP, and the positive comments on the accelerating jobs market and the fact that unemployment was falling faster than expected. The Fed painted a glowing picture of the US economic recovery.
The euro gave up 22 points to trade at 136.63 after soaring to the 1.38 price after the announcement. It was amazing to see market reaction on the charts after the Fed statement. The decision to taper is “ultimately positive for the dollar,”, because the Fed has become the first major central bank to begin policy normalization and has essentially endorsed the strength and stability of the U.S. economy. The dollar had initially weakened as news of the taper was offset by a dovish statement. German business sentiment picked up in December, according to a business-confidence index from the Ifo institute, paving the way for broader growth next year. The upbeat sentiment data comes a day after the ZEW sentiment survey showed German economic expectations jumped in December to their highest level since April 2006. Overnight the EU ministers agreed on a banking supervisor and policing activities for all banking in the Eurozone with the powers being turned over to the EU as opposed to individual member states.
Sterling climbed to $1.6398, paring some of its gains against the greenback after the Fed decision. Data released earlier Wednesday showed that the U.K.’s unemployment rate unexpectedly dropped to 7.4% in October, approaching the 7% threshold set by the Bank of England for when it could consider raising interest rates. The BOE currently expects the unemployment rate to fall to 7% by the third quarter of 2015.
The Japanese yen topped 104 against the greenback before the close and remained above in the Asian session. For Bank of Japan officials, the Federal Reserve’s decision to slow asset purchases is a good sign for Japanese exports as it reflects a continued U.S. economic recovery but the resulting further weakening of the yen is a double-edged sword for a resource-poor country. The Fed’s tapering method may provide a hint for the BOJ’s eventual exit from its own aggressive easing but for now, BOJ board members are mulling over options privately, pointing that before discussing the issue in public, they have to ensure the economy will overcome an expected slump in demand after the April tax hike.