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EUR/USD Crashes After Tapering Announcement

December 18, 2013

EUR/USD was rising steadily today, but crashed after the Federal Open Market Committee announced tapering of its asset-purchase program. The reduction was not very strong, but it was big enough to shake the Forex market. Now, as tapering has occurred, traders will turn their attention to other issues, including the proposed US budget plan, which may help to prevent another fiscal cliff.

Housing starts jumped from 889k in October to 1,091k in November, exceeding analysts’ expectations of 950k. Data for September and October was released today too, delayed by the October US government shutdown. Building permits declined from 1,039k in October to 1,007k in November, matching forecasts. (Event A on the chart.)

Crude oil inventories decreased by 2.9 million barrels, in line with expectations, while total motor gasoline inventories increased by 1.3 million barrels last week. (Event B on the chart.)

FOMC announced today a reduction of monthly asset purchases (event C on the chart), saying:

The Committee decided to modestly reduce the pace of its asset purchases. Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month.

At the same time, monetary policy remained accommodative:

The Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6–1/2 percent.

EUR/USD for 2013-12-18

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