The historic Fed hike sent EUR/USD one leg lower after the previous falls, but the pair continued with a move higher before finding some kind of balance slightly lower but the moves are not extreme, especially in light of such an important change.
What’s going on? What’s next? Here’s why there is potential to the downside.
A hike is a hike: a higher interest rate, despite being priced in, goes against the policy in Europe: a recent cut in rates.
And it wasn’t too dovish: the Fed didn’t change the “dot plot” – in theory we could still see 4 rate hikes in 2016, higher than the markets had expected. Markets had expected less hikes. Sure, the Fed could lower this, but not yet.
In addition, there were no dissenters and only some focus on inflation: the Fed wants to see inflation moving higher and faster.
This rattle and roll saw three handles: 1.09, 1.08 and 1.10 and eventually we’re back to 1.09, albeit at the time of writing, we are around 30 pips lower than before the event.
Perhaps markets are still trying to understand and analyze everything that happened and everything that Yellen said. One of the things she said towards the end of the presser was that she was seeing some signs of wage growth. If we have even OK wage growth, rates are expected to rise.
What’s next? I believe that the monetary policy divergence and the relatively not-too-dovish hike could send the pair lower.
Here is how this choppiness looks on the chart:
Historic Fed Decision – All the Updates
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