31 January 2013: Euro/USD steady as FED sticks to stimulus

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The US-Federal Reserve (FED) will continue its aggressive monetary easing stance. In the minutes from yesterday’s meeting FED pledged to stick to its ambitious 6,5% unemployment and 2% inflation targets as the US Gross Domestic Product (GDP) dropped by 0,1% in fourth quarter of 2012. The negative GDP number was somewhat of a cold shower for markets which dropped substantially both in the US, Europe and this morning in Asia. Asian markets fell off a 17 months high.

FED’s statement and the GDP numbers had little impact on the currency markets. Euro/USD reached 1.3588 upon FED’s announcement and keeps steady at 1.3569. Yen gained some ground trading at 90,80 yen against USD. Oil prices are up. Brent crude trades at USD 115 a barrel. Gold and silver prices regained ground and reached the highs for 2013 seen last week. Swedish and Norwegian krones trade at levels not seen against the dollar since before the financial crisis in the autumn of 2008.

The cautious FED statement which pledged to continue a monthly USD 85 billion bond-buying stimulus plan to encourage employment came few hours after the news that the US economy unexpectedly contracted in the fourth quarter. The weakness was mainly due to a plunge in defence spending, suggesting that the underlying fundamentals were better than the headline figures indicated.

European data showed an improved economic sentiment for a third straight month along with news that 100 billion Euros of private funds flowed back into the Eurozone periphery late last year. These capital flows have strengthened the Euro which broke through the 1,35 technical resistance level yesterday. 1,37 – 1,38 seems a reasonable short term target for the Euro/USD. Recent capital flows shall, however, not be read as an end of the Euro crisis. Economic fundamentals are still very weak with 25% unemployment levels in the European periphery threatening the delicate social balance. It is a question for how long the strong Euro policy will continue. Major international banks see a Euro/USD at 1,25 during the second half of 2013. 

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