EUR/USD

The US Federal Reserve delivered its first rate hike since 2018 on Wednesday, raising them by 25 basis points, to 0.25%-0.50%. The decision was not unanimous, since Mr Bullard voted in favor of a larger 50 basis points adjustment. ^[1]

Officials now see roughly six more increases this year, from three in their December projections, with the median projection now standing at 1.9% ^[2]. This implies rate increases potentially in every meeting of 2022.

The bank concluded its asset purchases program at warp speed and said that it the reduction of the balance sheet, which has ballooned to nearly 9 trillion, could begin at "a coming meeting". Chair Powell added some more detail during his press conference, commenting that this could come "as soon as our next meeting in May". ^[3]

Mr Powell, sounded upbeat on the economy, saying that it "no longer needs or wants this very highly accommodative stance".

On the other side of the Atlantic, Eurozone Consumer Price Index climbed 5.9% year-over-year in February, from 5.1% in the preceding month. This puts more pressure on the European Central Bank to tighten its monetary policy, having announced last week a faster conclusion to its asset purchases program (APP) - which we believe opens the door to rate hikes within the year.

The central bank however has to grapple with the economic fallout of the war in Ukraine, which may cause the economic engine to sputter. Ms Lagarde warned today that "Europeans will in the short term be confronted with higher inflation and slower economic growth". ^[4]

EUR/USD is recovering this week, as the Fed's lift-off did not surprise and the rise in Eurozone's inflation plays boosts prospects of tightening form the ECB.

It runs its fourth straight profitable day and threatens significant technical levels at 1.1150, where the EMA200 and the 50% Fibonacci of the last leg down coincide. Daily closes above this area would shift near-term bias to the upside and could allow the pair to look for fresh monthly highs (1.1233).

Despite the jovial mood, we remain cautious as the common currency had visited current levels last week as well and could not follow through. As such, risk of a return below 1.1000 has not gone away, but a larger retreat that would test 1.0901 does not seem easy at this stage.