Euro drifting ahead of FOMC meeting

The euro continues to have a quiet week and is trading just shy of the 1.13 level.

All eyes on FOMC

It has been a calm week for the euro, but that could change later today when the FOMC releases its policy decision.  Fed policy makers are in an unenviable position, as they strive to find that proper balance between responding to the inflation threat while also being careful not to be overly aggressive in raising interest rates. If the markets feel that the Fed has not achieved this delicate balance, it will let the central bank know loud and clear and we’ll see volatility in the financial markets after the meeting. Powell & Co. have done a good job telegraphing the markets and being transparent, and effective communication ahead of the lift-off of rate hikes will be crucial for market stability.

The Fed is virtually certain to raise rates in March, with FedWatch pegging the likelihood of a hike at 94%. The key question swirling in the markets is how aggressive will the Fed be in 2022. The baseline assumption is that the Fed will implement four rates hikes of 0.25% each. Still, the risk of additional hikes, given the surge in inflation, is tilted towards the upside. There is also the possibility of a 0.50% rate hike during the year, which would send a strong message to the markets that the Fed is determined to put a lid on inflation.

Another factor on the minds of investors is the tense stand-off between Russia and NATO over Ukraine. The US has said it is ready to send 8500 troops to Eastern Europe on short notice, but they will not be deployed in Ukraine. The crisis has escalated into a powder keg which could explode at any time. If Russia invades Ukraine, risk sentiment would sink and the safe-haven US dollar would likely jump at the expense of the other major currencies.

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 EUR/USD Technical

• In the European session, EUR/USD tested support at 1.1285. Below, there is support at 1.1226
• There is resistance at 1.1359 and 1.1418

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