European markets fading USD weakness this morning
After last night's dovish shift in the Fed dot plot, NY traders hit the USD hard sending the key pairs sharply higher (and lower), though with mixed results. Despite the fact that markets were already pricing in a flat year for US interest rates, the admission by Fed policymakers that rates were staying where they were this year led to heavy selling.
We saw EUR/USD taking out a strong band of resistance either side of the 1.1400 level, and we then went on to push through the highs seen in late Feb, when the market topped out around 1.1420 before the eventual ECB led drop to new lows below 1.1200. This may signal a near term base, though we continue to see a struggle to break 1.1500 higher up with 1.1450 the high seen last night.
USD/JPY also pushed lower aggressively, taking out 111.00-80 support to go on and challenge stronger levels here at 110.25-30. A move below here should see the mid to low 109.00's tested, with the stock markets drawing little comfort from the revisions in Fed interest rate projections, as well as the announcement that the Fed balance sheet runoff will end in September this year.
Looking to this morning's price action, we can see that USD bulls have not given up completely and European traders are a little more moderate on last night's FOMC. Despite no Fed hikes this year, yields are still in favour of the USD and more importantly, rates are not going up anywhere else. Europe has pushed out its next move beyond this year and the RBA and RBNZ are both expected to cut rates at some point. The BoC in Canada has also reined in their tightening bias to a wait and see approach, with the BoE in the UK clearly on hold until they get more clarity in Brexit. More from the BoE later today.
So as we can see, even though the Fed looks set to stay in hold for the rest of the year, the USD still measures up favourably against the rest of the pack, with safe haven statues also in its side as and when risk sentiment starts to sour.