The key takeaway for yesterday's FOMC meeting was that Fed members seemed less confident about the US recovery. The erosion in their optimism spread quickly to weigh on risk-correlated trades and further contracted US yields. Interestingly, the knee-jerk reaction in the Forex Market was the buying of the EURUSD. The Euro jumped nearly 50 pips against the dollar but as further analysis of the Fed's statement occurred, participants promptly began unwinding their newly acquired positions.

As the most anticipated FOMC meeting of 2010, the Fed didn't disappoint. They choose to reinvest maturing mortgage-backed securities and sustain the Fed's monstrous securities portfolio at the mammoth level of $2.054 Trillion. The Fed further asserted that they would only invest in 2y-10y US Treasuries with no purchasing of illiquid assets on the agenda. While the move is only a drop in the bucket when compared to the Fed's securities balance, the move should be viewed as a first, small step toward a 2nd round of quantitative easing.

The reinvestment decision by the Fed marks a shift towards a more expansionary monetary policy as it clearly removes any bias toward tightening. The statement confirmed that in order to help support the economic recovery, members voted to maintain the Fed's balance sheet at its current level through reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. Regarding the US recovery, the FOMC indicated that the speed of recovery and output has been dawdling in recent months.

After the Fed release, rhetoric from Finance Minister Noda increased significantly as the USDJPY approached the 85.00 psychological support. Noda and Vice Banking Minister Otsuka were on the wires commenting that FX moves after the Fed's decision appear to be a little one-sided. Excessive foreign exchange moves are bad for the economy, so we will keep closely monitoring the market. What we are seeing in Japan is an clear escalation in language coupled with market gossip that the government and BoJ will work together to weaken the Yen. A more likely scenario would be the BoJ using all its policy tools to pursue the weaker Yen. This way, the Japanese can avoid a direct, coordinated physical intervention which could have negative blowback from other governments and central banks.

The highlight of today's trading day will be the BoE's Quarterly Inflation Report. We anticipate the message of caution to remain unchanged and the report should reduce the likelihood of further QE, giving sterling a boost.

Today's Key Issues (time in GMT):
06:45 EUR FRA Jun current account balance; last E4.5 bln deficit.
08:30 GBP Jul claimant count, -16.5k eyed; last -20.8k.
08:30 GBP Jun ILO unemployment, 7.8% eyed; last 7.8%.
08:30 GBP Jun avge weekly earnings,
09:30 GBP BoE publishes quarterly Inflation Report
12:00 NOK Norges Bank policy-interest rate announcement 2.00 exp/prior
12:45 NOK Norges Bank press conference.
12:30 USD Jun intl trade bal, $41.2 bln deficit eyed; last $42.2 bln deficit.
14:00 MXN Industrial production, % y/y 7.4 exp 8.4 prior