Weekly Fundamentals: USD plunged after surprising fed decision

not to taper QE sent the dollar plunging, but reactions were quite different among different currencies. Last week, the highly anticipated FOMC meeting caught markets by surprise revealing the Fed will not start QE tapering as projected. As a result, the US dollar crushed. FOMC members were concerned about future economic outlook and the labor market claiming tightening of financial conditions will badly affect the US economy and could slow the pace of improvement. The Fed needs further proof for recovery before deciding to cut its $85 billion worth of treasury bonds. However, indicators released after the big decision were quite positive, and QE tapering could be seen in October.

Germans go to vote this week vote in federal elections, where Angela Merkel is expected to be re-elected. However, she might have to settle for a grand coalition with the opposition rather than see a repeat of the current government, and this might cause uncertainty.

EUR/USD certainly enjoyed the surprising NO Taper decision by the US Fed, and jumped to a much higher range. German economic sentiment jumped from 42.0 to 49.6 points in August to the best level since April 2010, further evidence to the pick-up in the Eurozone. The pair closed the week at 1.3524, highest rate since early February.

GBP/USD had a banner week, gaining over two cents. The pound received a strong boost from Claimant Count Change, which hit a multi-year low. As well, US manufacturing and consumer confidence releases were weak along with the no-tapering decision rallied the pound to a 9 months high on Wednesday until the pair closed the week at 1.6003.

The New Zealand dollar was well prepared for the Fed decision: recent data was positive and so were flows of money into real estate in the small country. When the FOMC announced the NO taper surprise, the New Zealand dollar jumped higher and didn’t really look back. A high level of QE in the US means more dollars printed looking for investments, and Auckland’s homes seem to be a good option for quite a few investors. The RBNZ, New Zealand’s central bank, tries to talk down the value of the kiwi at every opportunity, but this doesn’t always work. Macro prudential tools are considered to tackle the housing market. The kiwi gained over 1.5 cents this week and was closed at 0.8364.


Important events this week:

Monday
· French Flash Manufacturing PMI.
· German Flash Manufacturing PMI.
· ECB President Draghi Speaks.
· SNB Chairman Jordan Speaks (Swiss).

Tuesday
· German Ifo Business Climate.
· Core Retail Sales m/m in Canada.
· CB Consumer Confidence in the US.

Wednesday
· Trade Balance in New Zealand.
· Core Durable Goods Orders m/m and New Home Sales in the US.

Thursday
· Current Account in the UK.
· Unemployment Claims and Pending Home Sales m/m in the US.

Friday
· ANZ Business Confidence.
· ECB President Draghi Speaks.