The Fed has decided to extend the Operation Twist program until the end of the year instead of more quantitative easing. This means the Fed will continue to buy long-dated Treasury securities and sell shorter dated securities, thus adding upward pressure on the short-term rates. The Fed’s decision has dashed investors’ hopes of the past 2 quarters and reduced the selling pressure on the Dollar. The Dow Jones FXCM Dollar Index found support above the benchmark level at 10,000 and rallied significantly on the day following the announcement. The Dollar is likely to resume its bullish trading bias and head towards its previous high at 10,320.
The USD/JPY benefited from this decision as the Bank of Japan is more likely to launch more stimulus programs compared to the Fed. The pair has broken above the 50-Day and 100-Day moving average and is likely to reverse the downtrend it has been on since March. However, the European debt crisis is not yet over and the Japanese Yen may be supported by its safe-haven demand again. Investors should pay attention to the critical support located at 79.60-70 to seek opportunities to long the pair in the medium-long term, and a breakthrough above 80.60 is likely to trigger a short-term rally towards 81.65.
The EU summit this week has became investors’ last hope and the outcome will be critical in the medium-term. Greece’s new Prime Minister is not well enough to attend the EU summit due to his eye operation, meaning that the focus of the summit could be on how the EU leaders will support Spain to save its banking sector and prevent another crisis. The market is waiting for the EU summit to offer renewed hope on the ECB policy, but based on the experience of the past 3 years the result is expected to be fairly limited. The EUR/USD was rejected by the 50-Day moving average last week and has remained under pressure. The pair is likely to test its previous low at 1.23 shortly and a clearer outlook will be revealed after the EU summit.