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After reading up on the minutes of the last FOMC meeting, it seems that QE3 is back in play! Here are three reasons why the Fed might just pull the trigger!

The U.S. Labor Market Stinks

No, that ain’t doo-doo you’re smelling – it’s the U.S. labor market! Okay, fine, maybe I’m being a lil’ too harsh, but after last week’s NFP release, it’s clear that the labor market is in deep sh… trouble. In case you missed my NFP review earlier this week, lemme give you the 411 on what happened:

The report came in disappointing, as only 18,000 jobs were added to the economy, after it was expected that employment would jump by 97,000. In addition, May’s figure was revised down from 54,000 to just 25,000! Dang!

Looking at other labor stats, you’ll find that the unemployment rate is back up to 9.2%, while jobless claims remain well over 400,000.

Take note that this week’s minutes were for the FOMC meeting BEFORE last Friday’s NFP report. The minutes actually revealed that the committee was discussing more stimulus measures as early as then. What more now that last week’s report showed real weakness in the labor market?

No Money, No Honey

While we have seen some reports that have indicated improved sentiment in the U.S. economy, there are others hinting that everything ain’t all fine and dandy.

Personal spending showed no growth in May, which was rather disappointing as we saw spending rise in the months before. Meanwhile, retail sales ticked lower for the first time in 10 months, dropping 0.2%. In fact, the retail sales report for June is coming out today and expectations are that sales remained flat last month.

Other signs of decreased spending were a rise in wholesale inventory levels last May. This means that companies have been keeping more items in stock lately. Coupling this with the news last week that companies are making workers work less hours and keeping hourly wages flat, it seems that nobody is quite ready to go on a spending spree just yet.
What better way to stimulate spending than by injecting the economy with some cash?

The Fed is Frisky!

If you’ve been keeping close tabs on the Fed‘s monetary policy decisions, you’d know that Ben Bernanke and his boys haven’t exactly been tight-fisted when it comes to doling out more stimulus for the U.S. economy. In fact, the Fed was ahead of the pack when they first rolled out quantitative easing measures right after the global recession in 2008.

That is probably why, three years hence, there’s hardly any reason to doubt that the Fed would use its monetary policy tools to save the U.S. again. Time has shown that Bernanke and his sidekicks won’t hesitate to come to the rescue when the U.S. economy needs help. Isn’t that why Time (the magazine) crowned Bernanke as Person of the Year in 2009?

Now that QE3 is becoming more and more possible, we should brace ourselves for the possible impact on the forex market. To illustrate the effect of QE or just the mere mention of more easing, I posted the daily chart of the U.S. dollar index below:

EUR/USD May 6 Chart

As you can see, the USD made a huge drop starting in June 2010 when rumors that the U.S. would need another round of easing floated around the markets. A few months later, the Fed confirmed that they would indeed inject more stimulus in the economy and the dollar took another big hit.

QE2 was eventually put in place mid-November that year and USDX consolidated above the 80.00 handle, as traders tried to figure out whether this would be the last of the Fed’s easing measures or not. But alas! When talks of yet another round of easing, dubbed QE3 this time, began to hit the markets early this year, we saw more dollar-selling take place.

Right now, the U.S. dollar seems to be holding its ground as shown by the USDX trying to keep its head above the 75.00 mark. But for how long? We’ve already seen how the dollar behaved when the Fed swallowed its pride and admitted that the U.S. economy needs further stimulus, and we just might be in for another dollar selloff if that happens again.