In the end there was ‘much ado about nothing’. Market participants who had hoped for immediate sustainable moves after the Fed’s decision, were disappointed. The price action was relatively muted with only small fluctuations to both sides. In the end the U.S. dollar was the winner and accelerated against the euro and British pound.
Federal Reserve policy makers unanimously voted to raise interest rates up to 0.5 percent. This alone was the most hawkish scenario as there were no dissenters. Moreover, policy makers forecast an appropriate rate of 1.375 percent at the end of 2016, indicating four rate increases next year. This is unambiguously less dovish than the market anticipated. The FOMC is confident that inflation will rise and highlighted that the risks to the outlook for economic activity and the labor market are now “balanced”. On the bottom line the Fed statement encouraged dollar bulls not to give up on the dollar rally in the long-run. Nonetheless, we expected more momentum on that historic day. Investors are likely to begin their holiday season now, a reason for smaller movements and a decline in volume.
Important data for today (timezone GMT):
9:00 EUR German IFO Report
9:30 UK Retail Sales
13:30 USA Philly Fed Index
The reports could have a short-term impact on the currency pairs, but market participants are likely to digest the new Fed era and could be looking to buy dollars at lower levels. We therefore generally expect a bearish bias.
EUR/USD: Traders should pay close attention to the 1.08-level. If the euro falls below 1.0780, we see chances that it drops 100-200 pips towards the south.
GBP/USD: The focus is on the 1.49-barrier. Once this level is significantly breached, GBP could find a next support at 1.4820/15.
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