With Fed being one of the few central banks that aren’t hinting at a rate cut, this could create a monetary divergence between Fed and the rest of the central banks. EUR/USD could fall lower.
Fed left its interest rate unchanged during its monetary policy as widely expected at a target range of 2.25% to 2.5%, noting that inflation is “running below” its stated target of 2%.
Dollar rallied after Fed Chairman Jerome Powell dismissed any hint of easing, opposed to his peers who are looking at possible rate cuts in the near term.
- Powell said the current policy stance is “appropriate right now” and “we don't see a strong case for moving in either direction.” With nearly every central bank looking for a rate cut, Fed’s move is seen as hawkish.
- Powell also acknowledged the softer data from inflation, weaker consumer spending and business investment.
- However, he downplayed these concerns saying that low inflation is due to transitory factors and consumer spending and business investment should pick up with risks such as Brexit, the US-China trade war and European tariffs having “moderated.”
There are two reasons why we feel that the dollar could continue to strengthen:
- Powell is optimistic on the recovery of the economy and that view has been justified with the improvement of job growth, retail sales, manufacturing activity and GDP.
- The divergence of monetary and economic policy between the US and the rest of the central banks.
With this in mind, we believe that EUR/USD will worst hit as this pair has broken the historical support at the 1.1150 price region and could head lower towards 1.1130 again.
Fullerton Markets Research Team
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