EUR USD (1.2675) Irrespective of the ultimate impact of the measure, it was crucial for the Fed to extend Operation Twist to enjoy the continued confidence of the markets. With $267 billion and a six months extension, the Fed has more or less met consensus expectations. However, as Bernanke lowered the economic growth forecast, acknowledged that unemployment might remain durably high and credited the recovery to date with past policy action, some observers are a little puzzled that the Fed refrained from more aggressive easing, especially given the impact falling oil prices are likely to have on future inflation. The decision also gives the impression that there is no broad consensus inside the Fed that the current forms of QE are effective enough to accelerate the pace of economic recovery. We do not believe that the Fed’s arsenal is exhausted, though. Indeed, its reticence to ease is perhaps preparing the ground for more unorthodox measures. Once all the stakeholders are convinced of the evidence above, it becomes easier to argue that QE is necessary, is good for growth, and does not fuel inflation. All the Fed needs to do is to replace a QE that is losing its effectiveness with one that still packs a punch. The euro has established a new congestion area with (weak) borders at 1.2505 and at 1.2740. As the recovery would only make real progress above 1.2840, any move up to there could prove to be a false break.
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Deutsche Bank