EURUSD long in good shape after Fed decision
EUR/USD: Less hawkish Fed and Dutch election supported EUR/USD
Macroeconomic overview
The Fed delivered its first rate hike of the year – and the third increase since late 2015, when it began to normalize its policy stance. Yesterday’s move was universally expected and completely priced in by financial markets, after the most influential Fed members had all but preannounced the move at the beginning of the month, and last week’s strong employment report removed the last faint shadow of doubt.
Given that the Fed had raised rates only once per year in both 2015 and 2016, it is now only one hike away to fulfill Chair Yellen’s recent pledge that “the process of scaling back accommodation likely will not be as slow as it was in 2015 and 2016.” But the question remains, how much the pace of rate hikes is going to accelerate. Accordingly, the main focus yesterday was on the medium term policy outlook. And the latter has completely been left unchanged. First, the statement reiterated that “The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate.” Second, the FOMC members’ median interest projections (the “dots”) continue to signal three rate hikes for 2017 (including yesterday’s move) followed by another three in 2018. The unchanged policy outlook went hand-in-hand with an unchanged economic outlook. The updated GDP, unemployment and inflation forecast were essentially the same as in December.
The only notable changes in the statement were all related to inflation. Here, the FOMC acknowledged twice that the 2% target has basically been met. At the same time, however, the statement highlighted that the inflation target is symmetric, which means that the Committee is willing to tolerate a temporary overshoot, and that the Fed wants to see a "sustained" return to 2% inflation. This clearly helped to avoid sending a too hawkish message. Overall, the Fed now seems to be happy with its own outlook for three hikes per year, and the fact that financial markets agree with this projection.
The EUR/USD was supported not-only by less hawkish Fed, but also by Dutch election exit polls that pointed to a comfortable win by the prime minister over his far-right rival.
Dutch centre-right Prime Minister Mark Rutte scored a resounding victory over anti-Islam and anti-EU Geert Wilders in an election on Wednesday, offering huge relief to other governments across Europe facing a wave of nationalism. Rutte declared it an "evening in which the Netherlands, after Brexit, after the American elections, said 'stop' to the wrong kind of populism." With around 95% of votes counted, Rutte's VVD Party won 33 of parliament's 150 seats, down from 41 at the last vote in 2012. Wilders was second with 20, the CDA and centrist Democrats 66 tied for third with 19 each.
Technical analysis
The EUR/USD jumped yesterday after the Fed decision, pretty in line with our expectations. It broke and closed above the 1.0714 resistance (high on March 13). The rally was stopped near 1.0748, 76.4% fibo of February drop, but the momentum remains bullish.
Trading strategy
We stay EUR/USD long for 1.0820.
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Macroeconomic overview
The Fed delivered its first rate hike of the year – and the third increase since late 2015, when it began to normalize its policy stance. Yesterday’s move was universally expected and completely priced in by financial markets, after the most influential Fed members had all but preannounced the move at the beginning of the month, and last week’s strong employment report removed the last faint shadow of doubt.
Given that the Fed had raised rates only once per year in both 2015 and 2016, it is now only one hike away to fulfill Chair Yellen’s recent pledge that “the process of scaling back accommodation likely will not be as slow as it was in 2015 and 2016.” But the question remains, how much the pace of rate hikes is going to accelerate. Accordingly, the main focus yesterday was on the medium term policy outlook. And the latter has completely been left unchanged. First, the statement reiterated that “The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate.” Second, the FOMC members’ median interest projections (the “dots”) continue to signal three rate hikes for 2017 (including yesterday’s move) followed by another three in 2018. The unchanged policy outlook went hand-in-hand with an unchanged economic outlook. The updated GDP, unemployment and inflation forecast were essentially the same as in December.
The only notable changes in the statement were all related to inflation. Here, the FOMC acknowledged twice that the 2% target has basically been met. At the same time, however, the statement highlighted that the inflation target is symmetric, which means that the Committee is willing to tolerate a temporary overshoot, and that the Fed wants to see a "sustained" return to 2% inflation. This clearly helped to avoid sending a too hawkish message. Overall, the Fed now seems to be happy with its own outlook for three hikes per year, and the fact that financial markets agree with this projection.
The EUR/USD was supported not-only by less hawkish Fed, but also by Dutch election exit polls that pointed to a comfortable win by the prime minister over his far-right rival.
Dutch centre-right Prime Minister Mark Rutte scored a resounding victory over anti-Islam and anti-EU Geert Wilders in an election on Wednesday, offering huge relief to other governments across Europe facing a wave of nationalism. Rutte declared it an "evening in which the Netherlands, after Brexit, after the American elections, said 'stop' to the wrong kind of populism." With around 95% of votes counted, Rutte's VVD Party won 33 of parliament's 150 seats, down from 41 at the last vote in 2012. Wilders was second with 20, the CDA and centrist Democrats 66 tied for third with 19 each.
Technical analysis
The EUR/USD jumped yesterday after the Fed decision, pretty in line with our expectations. It broke and closed above the 1.0714 resistance (high on March 13). The rally was stopped near 1.0748, 76.4% fibo of February drop, but the momentum remains bullish.
Trading strategy
We stay EUR/USD long for 1.0820.
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