FX Daily Strategist: Europe

The FOMC left its policy message largely unchanged from the September statement. Language was inserted noting that the housing sector has slowed, and language from last month referring to recent tightening of financial conditions was dropped, no doubt in recognition of the decline in bond yields and surge in equity markets since September. Yields backed up only marginally in response to the disappearance of the financial conditions reference, but the USD posted a stronger rally, with EURUSD dipping below 1.37 and Cable briefly below 1.60. The USD’s ability to rally simply on lack of new negative news from the Fed adds more evidence to suggest that the market has become uncomfortably short USD. As we discussed in our FX Quant Insight publication yesterday, our STEER™ frameworks suggests the EURUSD and GBPUSD now appear expensive relative to key drivers, and USD shorts continue to look vulnerable.