EUR/USD Gains 319 Pips on Fed’s QEX And Levels to Watch Next Week September 17th 2012

The Euro closed the week 319 pips higher against the dollar and 268 higher against the Japanese Yen on the back of the Fed's decision to launch QEX. Since this was the most important news event of the past week and markets didn't move much until the FOMC's decision on Thursday, we'll focus this article on the Fed's latest QE effort.

QEX is an unlimited version of the Fed's previous programs QE1 and QE2 (QE=Quantitive easing). The Federal Reserve plans to buy 40 billion dollars of MBS ( Mortgage Backed Securities) on a monthly basis until the labor market “substantially improves”.

Just few months ago the Fed's launched its previous program “Operation Twist” where the Central Bank sells short dated bonds and buys longer dated bonds in an attempt to lower longterm interest rates. This program will remain operational along with the newest QE program. The Federal Reserve also extended its commitment to keep rates at very low levels until at least 2015, adding that rates will remain at those low levels even if the economy improves.

The Fed used the weak labor market as an excuse to start its newest experiment in monetary policy, but failed to provide a satisfactory answer why its previous QE efforts failed and why this time will be different.

Economists doubt the Fed can lower the unemployment rate

According to a recently published poll by Reuters, the median estimate of 52 economists puts the size of the Fed's latest QE at 600 Billion dollars. The estimate for the unemployment rate level at which the Central Bank may stop the QE is 7%. On the Fed's Twist, 49 out of 58 economists expect the Bank to extend the Twist after its expiry date in December.

But probably the most interesting part of the poll is that only 6 out of the 58 economists revised their targets for the unemployment level in 2013 and 2014, while 52 kept them the same even after the Federal Reserve latest QE effort, showing a general disbelief that the Bank can influence the unemployment rate.

The EUR/USD closed the week at 1.3126, just shy of a resistance level at 1.3144. This level was a weekly swing low marked in October 2011 but has not been respected much since so it will probably only provide small resistance . The Euro failed to close above this level, it reached a high of 1.3167 on Friday but later in the day retraced to close at 1.3126. Above 1.3144 next level of resistance lies at 1.3283, followed by 1.3384. If that level breaks, the next resistance level is at 1.3485, followed by the round number at 1.35.

To the downside, the 1.2974 – 1.3000 area the EUR/USD broke after the FOMC will provide support, followed by 1.2823. If that level breaks, the next support lies at 1.2750, closely followed by the 1.2700 level. Below this, the 1.2550 – 1.2588 area will provide support. You can see the rest of the levels to the downside on the chart below.

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