Hawkish Fed Surprises

Dear Traders,

Incredible but true: The U.S. dollar finally ended the trading day unchanged against the euro and British pound after it came under strong selling pressure following the weak U.S. inflation report. Market participants sold dollars ahead of the FOMC decision on speculation the Fed could forgo raising interest rates again this year. Weaker than anticipated inflation figures have led to the assumption the Fed may grow less hawkish but the opposite happened. The Fed statement was overly hawkish with Fed Chair Janet Yellen noting that the Fed continues to see conditions favorable in place for inflation to rise. Policy makers maintained their outlook for one more hike in 2017 and set out some details of the central bank’s plans to reduce its balance sheet. While U.S. economic data came in on the negative side most recently, it is difficult for the market to trust more the Fed’s rhetoric than the current data output. This fact limited the greenback’s strength and led to an almost unchanged picture.

We went long in both currency pairs EUR/USD and GBP/USD ahead of the Fed statement but gains were limited to smaller targets with the upward trend failing to be sustained.

The euro reversed shy of 1.13 and preferred trending around 1.12. As long as there is no sustained breakout either above 1.1285 or below 1.11, the technical picture in the EUR/USD remains unchanged favoring a sideways trend.

The cable took a glimpse above 1.28 but was unable to hold onto this high level. Sterling traders will watch today’s Bank of England policy decision at 11:00 UTC. While the BoE is unlikely to change its policy, attention will be paid to the central bank’s future guidance. A neutral stance might be considered as positive for the pound whereas a dovish stance could increase the pressure on the pound.

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