Last night, the FOMC meeting minutes finally confirmed what market participants had been speculating for quite some time already: a third round of quantitative easing (QE) from the central bank is indeed a possibility.
According to the minutes, there were a couple of members that an expansion of the central bank’s program may be needed again very soon. Although some agreed with this, they also indicated that they should only god ahead with it ONLY IF the economy losses momentum OR inflation stays below 2% for an extended period of time.
I think it’s pretty clear that there was some sort of inclination towards more QE, but it was also evident that they felt that it was inappropriate to initiate it as of the moment.
As for the economy, the minutes were slightly bearish. It revealed that Fed members had downgraded their growth forecast to the 2.2% to 2.7% level for 2012 and 2.8% to 3.2% for 2013. Additionally, they expect the unemployment rate to probably be higher their estimates, to 8.2% to 8.5% by the end of 2012 and 7.4% to 8.1% by the end of 2013.
Immediately after the release, the market took a nose dive with the DOW plummeting 0.76% and the S&P losing half a percentage point. Risk aversion was the name of the game, which meant the Greenback was bought up. EUR/USD, for instance, closed the day 53 pips lower.
So what’s next for the U.S. economy and the U.S. dollar? Although the FOMC members didn’t exactly paint an upbeat picture for the economy, they weren’t completely dovish either. After all, they did note that U.S. economy hasn’t gotten significantly worse (yet) and this gave the Greenback a chance to rally.
Then again, the Greenback owes most of its recent gains to the risk aversion spurred by the uncertainty in the euro zone. While this situation persists for the meantime, the U.S. dollar could continue to bank on safe-haven rallies as the prospect of QE3 has been placed in the backseat for now.
Looking at the 4-hour time frame of EUR/USD reveals that the pair is currently testing the major area of interest at the 1.3000 handle. If the U.S. dollar carries on with its recent rallies, a break of the 1.3000 support could confirm the end of EUR/USD’s uptrend and signal the start of a reversal.
For now, it seems that the Greenback could rely on a couple of factors, namely the ongoing uncertainty in the euro zone and the Fed‘s indecision, to push it higher. Do you think these factors can stay in place for the longer haul? Let us know by answering the poll below or sharing your opinion through our comments section!