We got what we have been looking for in a best-case scenario relative to our trades: A hawkish surprise from the Federal Reserve and a subsequent big price move in the U.S. dollar, providing a large monetary profit. We were able to take a 100-pips gain with our short trade in the EUR/USD and a 67-pips gain in the GBP/USD.
The Fed sent a more aggressive signal in order to prepare the market for a taper. Fed Chair Jerome Powell said that officials would begin a discussion about scaling back bond purchases, admitting that “the economy has clearly made progress”. “You can think of this meeting as the talking-about-talking-about meeting, if you like” Powell added referring to the taper debate.
However, the biggest surprise was the Fed’s dot-plot forecast that showed eleven officials saw at least two rate increases by the end of 2023 while seven of them saw even a move early as 2022. In comparison to the March forecast: The newest projections showed 13 of 18 Fed officials favored at least one rate hike by the end of 2023, versus seven in March.
The greenback soared on that hawkish signal.
Powell, however, cautioned the discussion about raising rates, saying it would be “highly premature”.
Are there more dollar gains in store? Maybe, as the Fed inches towards tapering but traders should be cautious amid thin liquidity conditions and the summer doldrums. Price movements could be limited to resistance and support levels.
EUR/USD: The euro dropped slightly below 1.20 but refrained from a dip below 1.1980 – at least for now. Below 1.1980 we see a next lower target at 1.1930. A break below 1.19 could even see accelerated bearish momentum towards 1.18 and 1.16. On the upside, a current resistance is seen at 1.2120.
GBP/USD: The cable broke below 1.40 and if the pair now falls below 1.3970 it may extend its slide towards 1.3910 and possibly even 1.38. A current resistance is seen at 1.41.
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