Fed Upgrades Outlook, Banks Beat Stress Tests

The Federal Reserve acknowledged recent improvements in economic data without hinting at any changes in monetary policy. Risk appetite soared after 15 of 19 banks passed stress tests and several announced share buybacks. NZD and GBP were the best performers while JPY lagged. The Asia-Pacific session will be generally quiet. Todays Premium trades include GBPUSD, EURUSD, CADJPY and oil . See below.

The Fed decision was generally as expected but some money that was in USD short on the chance of a dovish hint at QE3 quickly scrambled to the exits, leading to a short-term dollar rally. The Fed said unemployment had declined notably and that strains in financial markets have increased. Policymakers also acknowledged inflationary pressures due to oil prices but said the effects would be temporary.

The stress test results stole the show from the Fed. The study, which forecasts how banks would perform if unemployment hit 13% and other adverse events, gave a passing rating to all but four banks with Citigroup as the only notable failure. The results were supposed to be published Thursday but the Fed gave them to the banks Tuesday at noon. JPMorgan quickly announced plans to buy back shares and hike its dividend with others doing the same. The Fed claimed it was a mix up and decided to push ahead the reports publication.

Stocks jumped to a 3.5 year high after the report, with the S&P 500 gaining 1.8%. USD/JPY touched 83 for the first time since April 2011.

Asia-Pacific Preview

The calendar is somewhat busy but releases are lower tier and are unlikely to move the market. Westpac consumer confidence at 23:30 GMT, then Australia dwelling starts at 0030 and Japanese industrial production final revisions for January at 0430 GMT. At 0300 Chinese Premier Wen Jiabao gives his final press conference of the NPC.