It happened as expected: The Federal Reserve raised rates by 75bp and the market misinterpreted this month’s hike as a pivot towards a dovish monetary policy stance and thus sent the U.S. dollar tumbling. This is a classic market overreaction towards a potential monetary policy shift when the current guidance is already priced in. Caution is however warranted as we could be still far from the peak.
Fed Chair Jerome Powell said that another big increase is possible and projected rates to be at 3.8 percent in 2023, a projection that is above market expectations. Yet investors interpreted Powell’s comments that rate hikes will slow. The key phrase was that the pace of tightening would slow at some point but that didn’t flag a pivot to lower rates or even a pause, according to Fed watchers.
However, both euro and cable overshot following Powell’s comments. The best performer was the pound sterling that broke above the descending trendline and headed towards 1.22.
We believe that gains in the GBP/USD could be limited to 1.2250 as the pair entered overbought territory.
There were no breakouts in the EUR/USD which remains in its current trading range between 1.03 and 1.01.
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