Forex: Fed shakes currency market as it sets the stage for rate hike

Although no monetary policy decision has been made, last night’s Fed meeting had a resounding impact on Forex, sending the dollar higher.

The EUR / USD for example fell from 1.2115 before the meeting to a low towards 1.1985 last night, a plunge of 130 pips. USD / JPY, which was trading at 109.85 ahead of the FOMC’s announcements, climbed to 110.80 overnight. Finally, the GBP / USD went from 1.41 to 1.3970 within hours as well.

Fed shakes Forex as it begins to prepare for rate hike

The biggest highlight of yesterday’s event was the update of Fed members’ rate projections, via the dot-plot chart, one of the most influential Forex documents.

Fed members are thus anticipating two interest rate hikes by the end of 2023 – sooner than many expected – and have revised inflation estimates upward for the next three years.

“The economy has clearly made progress,” said Powell after a two-day meeting of the Federal Open Market Committee. “You can think of this meeting as the meeting to talk about it, if you like,” he added, referring to the discussion on reducing asset purchases.

Quarterly projections show that 13 of 18 officials support at least one rate hike by the end of 2023, up from seven in March. Eleven of them predict at least two increases by the end of that year. In addition, seven of them were planning a move as early as 2022, compared to four previously.

However, Powell warned that the rate hike talks would be “highly premature,” which hasn’t stopped the dollar from reacting positively to Forex.

Finally, the FOMC raised its forecast for economic growth. Gross domestic product is expected to increase by 7% this year, against an earlier forecast of 6.5%. He kept the expansion forecast for 2022 at 3.3% and raised the estimate for 2023 to 2.4%, from 2.2% in March.

Two banks abandon their bullish view of EUR / USD following the Fed

What can be seen as the Federal Reserve’s hawkish turn has prompted two major banks, Goldman Sachs and Deutsche Bank, to question their forex forecasts, including abandoning their bullish outlook on EUR USD.

“We continue to forecast general weakness in the US dollar, due to the strong valuation of the currency and the broadening of the global economic recovery”, but “the Fed’s more hawkish expectations and the ongoing debate on the reduction bond purchases appear to be a headwind for short dollar short positions, ”said Zach Pandl, the bank’s analyst.

For its part, Deutsche Bank said that there is now “more leeway for a revaluation of real rates at the front of the US yield curve” and also “a place for greater volatility. ”.

“Both of these factors are bullish for the dollar,” she said, adding that “the Fed’s support for the EUR / USD rise is no longer there.”

What objectives on the major Forex pairs?

The most important technical consequence of the Fed meeting last night was the euro dollar test below the major psychological level of 1.20. For now the currency pair is trying to get above this threshold, but the trend remains fragile. A break confirmed below this key level would be a very important bearish technical signal for the Euro dollar and could portend further losses. In this context we will first watch a graphics support located around 1.1950. On the upside, only a return above 1.2060 will begin to question the bearish profile of the euro dollar on an hourly basis.

As for USD / JPY, the 110.80 threshold tested last night along with the psychological threshold of 111 are the next 2 most logical potential bullish targets. On the downside we can identify a first support towards 110.60 before another important threshold at 110.30 then the key psychological threshold of 110.

On the GBP USD, the 1.3970 level is the first major support to watch, before further potential support at 1.3950 and then 1.39. On the upside, a return above the major psychological level of 1.40 would be an encouraging signal. However, to begin to really question the currently bearish bias in hourly data, the GBP USD pair will need to at least cross back above 1.4050 on the forex.

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