EUR/USD Upbeat After Hawkish Fed, Turns to ECB

  • EURUSD
    (${instrument.percentChange}%)

Fed Decision

The US Federal Reserve announced on Wednesday that it will speed up the reduction of its Quantitative Easing program (QE) to $30 billion in January and at that pace it is expected to end in Q1 2022.

The tapering only started in November, but the surge in inflation and "further improvement in the labor market" led the central bank to bring QE conclusion forward.

The dot-plot was a main focal point, as all official now see higher interests rates in 2022, with the median projection pointing to three rate hikes next year.

Back in October 2014, when the Fed had announced the conclusion of QE4, it had said that it would be appropriate to keep rates unchanged for "a considerable time". Interest rates ended up rising in December of the next year.

When Mr Powell was asked yesterday, as to how long would have to wait this time around before a rate hike and he said officials have haven't taken a position on that, but does not foresee that there would be a very extended wait. [1]

Eyes on ECB

Focus now shifts to the European Central Bank (ECB), which is on the dovish side of the monetary policy spectrum, with its President at the forefront. Ms Lagarde had noted earlier in the month that It is very unlikely to see rate hikes in 2022. [2]

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So rates are out of the picture, but investors will be looking for any news around the €1.85 trillion Pandemic Emergency Purchase Programme (PEPP) which is scheduled to run at least until March 2022.

The central bank runs a 20 billion/month Asset Purchase Programme (APP) as well, which could be bumped up, if/when the larger PEPP ends.

The updated economic projections are also released today and MS Lagarde holds a press conference.

EUR/USD Analysis

Yesterday's Fed decision spurred volatility, but the pair closed higher, as the event did not produce anything much different than what was expected.

Today it extends gains, surpassing its EMA100 and reclaims 1.1300. This keeps the key 1.1370-80 area in play, but catalyst will be required for a break and potential moves towards and beyond 1.1439.

Despite today's vitality, the monetary policy divergence remains unfavorable for the common currency and the broader downtrend remains intact, while its recovery efforts have not produced anything noteworthy.

As such, EUR/USD is vulnerable to sub-1.1250 retreat and remains in danger of fresh 2021 lows (1.1184).

In any case, technicals are in the background as the ECB's decision is likely to determine the pair's trajectory and can potentially produce outsized moves.


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Nikos Tzabouras

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.

References

1

Retrieved 16 Dec 2021 https://www.federalreserve.gov/monetarypolicy/fomcpresconf20211215.htm

2

Retrieved 03 Jul 2022 https://twitter.com/Lagarde/status/1466686551786770433

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