Did the Fed Put a Floor Under the Euro?

The Euro has been in a free fall, prior to and following the ECB announcement that the central bank would pump liquidity into the market in an effort to buoy inflation. Yesterday’s announcement by the Federal Reserve, could be the impetus that temporarily stems the slide in the EUR/USD.

The FOMC repeated the wording of its previous January statement saying it would be patient with the start of policy normalization. Besides this meaning that their decision would be data dependent, it also means that the Fed would wait at least 2 meetings before considering action. While the central bank noted a solid pace of growth for the United States economy it also reflected on the declining rate of and inflation from its target rate. Recall that the Fed targets an inflation rate of 2%.

The Fed seems to be optimistic on the economy, as said in its statement that the underutilization of labor resources continues to diminish. In Fed speak this means that the jobs market is improving and less jobs are now available despite nearly 1 million still being advertised for. The FOMC allowed the considerable time phrase to lapse, though the retention of patient from December implies no rate hikes at the March and April meetings. This makes June the earliest time for a tightening.

The key line in their statement which cause a huge move in the treasury market was their notation of international developments for the first time as factor in its policy calculus. This means that the Fed will be watching Europe and Asia, and will likely hold their normalization procedures while the ECB and the Bank of Japan are proceeding with their bond purchase programs. Once the market saw this in the Fed statement they immediate pushed long term bonds to new yield lows. In fact, the 30-year treasury hit an all-time low at 2.29%.

With US rates moving lower, the dollar became less attractive, and traders who are long the greenback started to have some doubt. If the yield differential between US and European yields were to contract, the dollar would become less attractive. This would essentially put a temporary bottom under the dollar. Given that the ECB will continue to pump 60 billion worth of Euro’s into the market per month, the bottom will only likely be temporary.

The long term technical point to a test of the 2004 lows at 1.0760, but the currency pair is severely oversold. The relative strength index (RSI) is printing a monthly reading of 25, which is well below the 30 oversold trigger level and could foreshadow a correction. The commodity channel index, which is also a momentum oscillator that measures overbought and oversold levels is printing a reading of -245, well below the oversold trigger level of -100 and also is pointing to a correction.

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