EUR USD (1.3110) The Fed guidance on ‘exceptionally low’ interest rates until late 2014 sparked a rally in equities and a dollar sell-off. The subsequent hair-splitting in the market on what range of interest rate the words ‘exceptionally low’ actually might imply, or the attributing of dovish and hawkish stance to particular members, does not take away from the fact that the Fed has set the stage for the next wave of QE. The Fed’s push towards transparency is likely intended to reassure equity investors that at least the future interest rate trajectory will not put in jeopardy any recovery in the markets. In our view the guidance also implies that the Fed, unlike the ECB and the BoJ, will not restore rates and then face a situation where it has to lower them again. The Fed is likely to continue siding with the BoE. Despite some expectations to the contrary, the Fed set an inflation target. By doing this it might have opened itself to be perceived as pre-commited. But as reiterated by Bernanke himself in the press conference, it does not in any way blur the focus on elevated unemployment – investors would expect nothing less from the Fed so this should not have surprised either. We believe that much of the market ‘surprise’ comes from the novelty of the large spectrum of views in the Fed, rather than the content. Once this novelty fades, the new information will be treated by the market as regular parameters available as input. For the euro, our bullish target at 1.3285 remains intact. The risk-limit is now raised to 1.2920.
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Deutsche Bank