Market participants were taken by surprise by a hawkish FOMC statement and the dollar surged across the board.
Financial markets did not anticipate the hawkish risks heading into Wednesday’s FOMC statement and economic projections and were taken by surprise by a pro-active Fed. The Fed raised the interest rate by five basis points on excess reserves and hinted, using the dot plot, at two rate hikes in 2023.
Because the market priced in only one rate hike, the dollar exploded higher. So abrupt was the move that by the time the press conference started, thirty minutes after the statement’s release, the EUR/USD had fallen over a hundred pips already.
From that moment on, the dollar kept rising, gaining against its peers, with one exception – the Japanese yen. The curious case of the Japanese yen continues, as the market participants are puzzled about what moves this pair since it lost its correlation with the US stock market. As such, the USD/JPY gave back almost all of its FOMC gains on investors’ appetite to buy the yen.
The US equity markets did react to the Fed’s message, but not as aggressively as one might have thought. In the end, the Fed did not announce the tapering of its asset purchasing, but rather a recalibration of market expectations, especially when it comes to the world’s reserve currency, the US dollar.
Therefore, the Nasdaq 100 still holds comfortably above the 14,100 points, the Dow Jones trades in the close vicinity of 34,000 and the S&P500 index holds steady above 4,200. In Europe, nothing changed, with the German DAX at record highs and the other indices such as the UK’s FTSE100 trade with a bid tone, too.
Gold took a big hit on the Fed’s announcement. After meeting stiff resistance at the $1,900 level, gold declined below $1,800 and still trades with a bearish tone. Crude oil remains bid while above $70, largely unaffected by the FOMC statement.
No important events are scheduled today, so the focus will be on how the market digests the new Fed’s message and how market participants choose to head into the weekend.
Markets to Watch
Gold, EUR/USD, EUR/JPY – markets in focus today.
The $1,900-level proved to be stiff resistance for gold. After the double bottom below $1,700, gold bounced over two hundred dollars. However, it broke the bearish trendline before the Fed announcement, and the dollar’s strength puts further pressure on the yellow metal. A move below $1,720 sets the tone for more weakness, with the market possibly pushing to the double bottom support at $1,680.
The EUR/USD pair looked poised to advance only a couple of days ago. The price action above 1.21 was so bullish that every single move lower was bought aggressively. But the Fed statement and message changed everything. Moreover, one day after the Fed communique, the ECB reiterated its willingness to retain easing conditions, basically leaving the Fed to lead the tapering process. Hence, investors were left to watch the repricing of the new information and the EUR/USD led the way.
One of the strongest market reactions came from the EUR/JPY cross. Because of the Japanese yen’s strength and the euro’s weakness, the cross travelled the most – even more than the two major markets it represents, the EUR/USD and the USD/JPY. On its move to the downside, the EUR/JPY reached the measured move of a head and shoulders pattern, but that is only the minimum distance the market travels after such a pattern. Moving forward, the 130 psychological levels will attract price, and one should not be surprised if the EUR/JPY will be called at 130 for the end of the trading week.
Winners and Losers
The US dollar squeezed higher after the Fed meeting. Also, the Japanese yen strengthened surprisingly at the end of the trading week. The euro, on the other hand, fell across the board.