EUR/USD broke below a key uptrend that has been in play since November and fell to fresh one-month lows in the 1.1220s in response to the latest Fed policy announcement. The dollar was bought across the board in response to the Fed’s new dot plot showing that the median expectation of policymakers is for three interest rate hikes in 2022, a more hawkish showing than some had anticipated. The hawkish dot plot was the main surprise.
Otherwise, the Fed left rates at 0.0-0.25%, doubled the pace of its QE taper to $30B a month from January (though maintaining flexibility to adjust at a later date) and lifted its 2022 inflation forecast all as expected. Markets will now be watching what Fed Chair Jerome Powell has to say at his usual post-meeting press conference, which kicks off at 1930GMT.
Back to EUR/USD; now that the pair has broken to the south of the aforementioned key downtrend and prior monthly lows, the door is open for an extension of the downside towards the November lows under 1.1200. Powell will need to maintain a hawkish tone in the press conference for this to happen. One theme to watch might be his rhetoric on what constitutes the greater threat to the Fed’s mandate for full employment. In the past the Fed has emphasised the need to keep policy accommodative to reach this goal, but Fed rhetoric has recently shifted recently to noting that high inflation is the greater threat.
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