The US Federal Reserve announced on Wednesday the tapering of its Quantitative Easing program (QE) by $15 billion/month, to begin later in November. However, this was largely dovish, as the bank did not commit to the tapering pace beyond December and did not link the unwinding its asset purchases with future rate hikes, delivering overall the minimum of what was expected.
The US Dollar dropped on the news, sending the pair higher yesterday, but the tightening of monetary policy is expected to be supportive for the greenback, mostly against currencies that are backed by central banks that are behind the Fed in the policy normalization process.
The European Central Bank (ECB) is one of those, as it maintains at this stage a massive stimulus program, with its President Ms Lagarde, making some very dovish comments recently. The latest one came on Wednesday from Lisbon, as she commented that rate hikes are unlikely in 2022.
On the Fed's side, nine officials saw higher interest rates as per the September projections, with next forecasts due in Decmeber, while markets are far more aggressive and see rate multiple hikes in H2 2022.
Furthermore, the Fed has a problem with high US inflation and although it maintains its transitory view, it is clear that it is less certain lately. A stronger USD would help contain inflationary pressures, while a lower Euro o the other hand can help the ECB sustain its expansive monetary policies.
Given all this, the path of least resistance at this stage seems to still be lower for EUR/USD, which drops today and erases its post-Fed gains. From a technical prospective, it rejected the 38.2% Fibonacci of its last downward move (September - October) last week, creating heightened risk for fresh 2021 lows (1.1523), with the first support located at around 1.1500-1.1492. Further decline, will bring the 1.1400-1.1390 area in the spotlight, but it may still be early for such move.
On the other hand, the pair did stage a rebound after its October 2021 low and another similar effort could be in the cards, but the upside has significant obstacles.
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Senior Market Specialist
Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.
With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.
Retrieved 04 Nov 2021 https://www.ecb.europa.eu/press/key/date/2021/html/ecb.sp211103~d0720ef27b.en.html
Retrieved 04 Nov 2021 https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20210922.pdf