USD rallies on surprise taper announcement traders hopeful of positive data out of US

Finally, after months of speculation, we have the first round of cuts making the historic move last night to taper $10 billion from the monthly total of $85 billion; with an even split from treasuries and mortgage bonds.

The initial trade was strong USD – as expected with the move but after the market heard that forward guidance has been revised we soon saw it lose its gains. This helped GBP/USD to hit a new high for the year, following which USD rallied, pushing the markets back through the pre-market levels we were at before the taper.

This has continued over the Asian session, with confidence building in the USD.  The change they’ve made is that interest rates will stay near zero for an extended period, even after the initial target of unemployment hits 6.5% as long as inflation stays below its 2% target.

So for now it seems that Bernanke has made a good balance. The surprise cut and change in forward guidance has been taken well by the markets and not caused the chaos feared by most.

The next question is how much taper will be done month by month? There are talks of $5-30billion per month so with such a range each FOMC will still be as important as the one last night – showing signs of recovery or a mistake to taper.

Amongst all the excitement of the FOMC, another big step for the US was the US Senate passing a two-year budget deal to ease spending cuts. This will now avert any shutdown over the budget but is still one to watch as the debt ceiling has still not been agreed; leaving another big decision early next year for the US to make.

Today’s data from the UK is retails sales, which is expected to be at 0.3% or possibly higher, with the Christmas shopping early birds last month.

In the US, unemployment claims are expected to drop and, with last night’s surprise, I think the US will be hoping this is correct otherwise it could cause some unrest with the decision.

Also in the US keep an eye out for existing home sales and the Philly Fed survey. We would again be expecting better data here due to last night. And, if weak data appears, we should see a drop in the USD as concerns will start earlier on with the decision.

EUR/USD

Supports 1.3650-1.3615-1.3295 | Resistance 1.3700-1.3740-1.3800

USD/JPY

Supports 103.70 103.30 103.00 | Resistance 104.50 105.00 105.75

GBP/USD

Supports 1.6350 1.6260 1.6220 | Resistance 1.6465 1.6485 1.6500