EUR USD (1.2235) Market disappointment at the Fed minutes has to be evaluated against the changed backdrop where other central banks namely the ECB and BoE, as well as several Asian monetary authorities have engaged in easing since the Fed meeting. The Fed thus has the appearance of being less dovish than others. That said, the minutes themselves basically reflected the concerns the FOMC’s revealed in June, namely, that the benefits of easing have to outweigh the costs. Several observers have identified the easing bias in the current minutes conditional upon the economic recovery losing momentum. However, we do not believe that one can simply use the parameters that preceded QE1 and QE2 to predict QE3. The difference this time is that the potential disruption to the Treasuries market is greater because the Fed already holds so many bonds and, of course, yields are now much lower than before. So, although job and manufacturing data has worsened since the FOMC meeting, the threshold for economic deterioration before the committee would consent to easing is likely to be even higher. The Fed minutes only briefly pushed the dollar index higher. However, we continue to expect more weakness in the euro. As long as 1.2210/20 is not violated first, we would embark on a bearish strategy at 1.2365 with a risk-limit at 1.2415. The target would be at 1.2155.
Click here to read the full report: Daily Forex 07.12.12
Deutsche Bank