After Dovish Fed Surprise Focus Turns To ECB

The Federal Reserve surprised on the dovish side and thus, caught traders off guard who were speculating on a hawkish signal. The U.S. dollar sharply weakened across the board.

As for our yesterday’s trading signals, we had two losing trades by selling the GBP/USD ahead of the FOMC decision. Our later buy order in the cable at 1.2580, however, compensated all previous losses.

In the EUR/USD we went long at 1.0810 and reached our profit target within seconds.

What has caused this tentative pivot?

As expected, the Fed kept borrowing costs unchanged but policymakers gave the first sign of an impending strategy pivot by embracing a more benevolent characterization of inflation and admitting that rate cut talks have begun. Also, the dot plot showed 75 bp of easing next year, far more than contemplated in September. In other words, the Fed’s forecasts are slowly converging toward the market’s expectations. This bearish bias for the U.S. dollar and yields could thus set the tone moving into 2024.

ECB and BoE next

After the surprise rally yesterday in all of our trading instruments it will be interesting whether there will be more surprises from monetary decisions from the BoE and ECB. In the market’s eyes, the ECB and Fed are seemingly arm wrestling over who will cut rates first next year. The BoE is lagging behind in rate cut expectations.

The focus will be on the updated economic projections and rhetoric from the ECB. The market is pricing in 125 bp of easing by the ECB next year, so if ECB policymakers send a more dovish signal than expected, the euro will fall from its highs. In the hawkish case of any pushback on rate cuts, the euro will continue its uptrend very easily.

Our trading ideas for today 14/12/23:

EUR/USD

Long @ 1.0920

Short @ 1.0875*

GBP/USD

Long @ 1.2660

Short @ 1.2615*

Disclaimer: All trading ideas and expressions of opinion made in the articles are the personal opinion and assumption of MaiMarFX traders. They are not meant to be a solicitation or recommendation to buy or sell a specific financial instrument.