Dollar Slumped after Fed Cut 50 bps by Yan Xu

The dollar slumped across the board after the Fed cut federal funds rate half a percentage point to 4.75%. The unanimous decision surprised the majority of the market who had expected a rate cut of only 25 basis points.

Against the dollar, the euro broke the 1.39 handle easily and rose up to an all-time high at 1.3980. The dollar dropped 50 pips instantly to 115.25 versus the yen after the FOMC announcement. The rate cut fueled the stock rally and also gold surged to a 28-year high on that.

The FOMC statement showed the rate cut is designed to forestall adverse economic effects. The Fed will continue to monitor effects and act as needed. It also stated that readings on core inflation have modest improvement and tightening of credit conditions may intensify housing correction.

Earlier in the session, US PPI, an inflation gauge, unexpectedly declined 1.4% in August, the largest drop since October 2006. This added to the expectation of a Fed rate cut. Excluding food and energy, core index rose 0.2%. US TICS data showed net long-term flows excluding swaps, fell from 120.9 billion to 19.2 billion in July, indicating a decline in international demand for US assets. Besides, US September NAHB came out at 20 as expected.

The euro was little changed after a weaker-than-expected Germany ZEW report as the market focus was on the FOMC. The headline declined to minus 18.1 in September, below the estimate of minus 15.5 and a previous reading of minus 6.9. The current conditions dropped from 80.2 to 74.4 as expected.

The European Central Bank Miguel Angel Fernandez Ordonez, a member of ECB governing council, said today there is still a chance that inflation may accelerate.

EURUSD will face interim resistance at 1.40, followed by 1.4020 and 1.4050. Additional ceilings will emerge at 1.4080, backed by 1.41. Support starts at 1.3950, backed by 1.3930, 1.39 and 1.3880. Subsequent floors are eyed at 1.3850.

USDJPY encounters interim resistance at 115.50, backed by 115.80 and 116. Subsequent ceilings will emerge at 116.30, followed by 116.50 and 116.80. On the downside, support begins at 115 and 114.80, followed by 114.50. Additional floors are eyed at 114.30, backed by 114 and 113.70.

GBPUSD encounters interim resistance at 2.0150, backed by 2.0170 and 2.02. Subsequent ceilings will emerge at 2.0230, followed by 2.0250 and 2.0280. On the downside, support begins at 2.01, followed by 2.0070 and 2.0030. Additional floors are eyed at 2, backed by 1.9980 and 1.9950.