USD Slides Sharply as FOMC Extends Pledge to Hold ZIRP Through Late 2014

The FOMC surprised markets with a more dovish than expected tone.

Mainly the new language calling for "extremely low rates" through at least late 2014.

From FOMC Statement: "To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions-including low rates of resource utilization and a subdued outlook for inflation over the medium run-are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014."

On the economy, while saying that labor market conditions have improved and household spending has continued to rise, the FOMC has a dim view of business spending and housing.

"Information received since the Federal Open Market Committee met in December suggests that the economy has been expanding moderately, notwithstanding some slowing in global growth. While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed.

There is also major concern for a shock from the financial system.

"Strains in global financial markets continue to pose significant downside risks to the economic outlook."

On the inflation front, the FOMC - seeing several months of flat headline inflation - sees inflation running below its mandate

"Inflation has been subdued in recent months, and longer-term inflation expectations have remained stable…

The Committee also anticipates that over coming quarters, inflation will run at levels at or below those consistent with the Committee’s dual mandate."

The development has sparked a sharp spike in favor of risk-sensitive currencies and weakened the USD. Gold saw very strong gains as well.

The EUR/USD failed to confirm a double top, and instead changes the perspective on the current patter to be an expanded flat, to be followed by bullish continuation. 1.32 is the next resistance above 1.3080.

AUD/USD also is confirming the bullish outlook as it continues to respect a broken resistance trendline as support. The break now above the previous 1.0572 high opens up 1.0770.

The USD/JPY also failed to break above 78.25, and remains in range after the FOMC meeting. The 77.32-77.40 area is support and central pivot for the range.

The threat of reversal in gold is averted as the market failed to push below 1640 and the RSI maintained above 40 and is now back up above 60 kissing 70. A sit pops up above 1700, 1800 is the next target.