Foreign Exchange Report : Federal Reserve Announces ‘Operation Twist’ Sending GBP USD Rate to Within Touching Distance of a 14-Month Low

22 Sep 2011 at 6 AM - Written by John Cameron

STORY LINK Foreign Exchange Report : Federal Reserve Announces ‘Operation Twist’ Sending GBP USD Rate to Within Touching Distance of a 14-Month Low

The Pound Euro exchange rate (GBP EUR) is 1.1413. The Pound Dollar exchange rate (GBP USD) is 1.5459. The Pound Australian Dollar exchange rate (GBP AUD) is 1.5418.

It was a case of ’back to the future’ for the US Federal Reserve last night, as they announced the introduction of a ’twist’ scheme to inject additional liquidity into flagging credit markets.

‘Operation Twist’, which was first used in the 1960s and is named after a dance craze popular at the time, will see the US’s central bank buy back government bonds which are due for maturity within the next three years and replace these with longer term gilts.

The ’twist’ scheme will not see any new money generated, so it can’t be viewed as a Quantitative Easing policy as such, however its aims are the same - i.e. to increase the amount of credit made available to private individuals and small-to-medium sized businesses via a ’trickle-down’ effect from commercial banks and financial intermediaries.

The market’s immediate reaction to the Federal Reserve’s announcement was Dollar-positive, as investors expressed their relief that the US was avoiding further Quantitative Easing, in the near-term at least. Previous announcements of QE by central banks have seen their currencies weaken dramatically over a short period of time.

The Greenback gained further support last night due to comments by Federal Reserve Chairman Ben Bernanke in his press conference which followed the FOMC announcement. Bernanke delivered a typically downbeat appraisal of both the US economy and the global economic situation, in general. The Fed Chairman pointed to ‘continuing weakness’ in the US labour and housing markets and observed that there were ‘significant downside risks’ due to the state of global financial markets.

These comments caused an immediate scaling-back of investors’ appetite for risk, which had been showing signs of improvement over the 48 hours leading up to the Fed statement and Bernanke’s press conference. This saw the benchmark S&P 500 share index closing down by 2.94% on the session as investors abandoned riskier assets to seek out safe havens.

Yesterday’s events combined to send the GBP USD rate to yet another new 8-month low, this time in the 1.54s, during today’s Asian session. The pair is now eyeing September 2010’s low of 1.5297 as the next key level on the downside. A move below this level would mean that GBP USD had broken to a new 14-month low - a massively bearish technical signal for the pairing.


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