Yen Retreats Sharply After Fed Steps in with 50bps Discount Rate Cut
Fed stepped in before US open to restore “orderly conditions” in financial markets. Unexpectedly, Fed reduced the discount rate, the rate that Fed charges banks, by 50bps. The discount rate was at 6.25%, 100 bps above the Fed funds rate, the rate that banks charge each other for funds. Also, Fed effectively doubled the maturity length for term financing to 30 days. Also the Fed has changed their economic outlook and acknowledged market conditions have ‘deteriorated’ and economic growth growth has ‘increased uncertainty’.
Stocks rocket higher with Dow up 300 pts on the speculation that Fed is now much closer to a cut in the fund rates. In the FX markets, yen was sent sharply lower across the board after the announcement. While dollar also rebound against the yen, the most hit these few days are those rebound most strongly. Euro, Sterling, Aussie, Kiwi and Loonie are all up against dollar too. Meanwhile, the Swissy remains firm against dollar too.
The Fed’s statement reads:
“Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.”
EUR/JPY
Daily Pivots: (S1) 149.67; (P) 153.20; (R1) 156.39; More
EUR/JPY’s strong rebound from 149.27 and break of 153.94 resistance indicates a short term low is already in place there. At this point, further consolidation should be seen with risk of stronger recovery. But still, But upside should be limited below 159.97 support turned resistance. Below 151.70 will bring retest of 149.27 low and break will bring another fall to next downside target of 200% projection of 168.93 to 160.44 from 165.39 at 148.41.
In the bigger picture, long term rising trend line support (137.16, 150.75 now at 156.93), 55 weeks EMA (157.19) and 100% projection of 168.93 to 165.39 from 160.44 at 156.90 were all taken out decisively. Firstly, break of the trend line will confirm that the whole up trend from 130.60 has completed with five waves up to 168.93. Secondly, break of the 100% projection level suggests that the fall from 168.93 is impulsive in nature. Together they point to the scenario that the long term up trend has already completed and reversed. With 150.75 support now taken out, the next medium term downside target will be 61.8% retracement of 130.60 to 168.93 at 145.24. On the upside, it will take a strong rebound to above 159.97 to confirm that fall from 168.93 has completed.
Read full report (EUR/USD, GBP/USD, USD/CHF, USD/JPY, EUR/JPY) here.
Shing-Ip Tsui is the founder and CEO of www.ActionForex.com. ActionForex is set up with the aim to empower individual forex traders by providing insightful contents. Analysis reports, live pivot points on majors and crosses, etc are provided with collection of carefully selected educational articles and free trading ebook downloads.