Euro rattled as Fed sends hawkish message

What started off as a calm week has turned into a rout. The euro is down 0.83% in the North American session and has fallen into 1.11 territory for the first time since June 2020. The currency has taken a nasty spill this week, falling a massive 1.73%.

US GDP outperforms

The markets are still buzzing over the hawkish Fed meeting, which has overshadowed today’s stellar US GDP report. GDP for Q4 expanded by 6.9%, exceeding the consensus of 5.5% and up from 2.3% in Q3. The GDP Price Index came in at 7.0%, beating the forecast of 6.0%. The stellar data points to a strong US economy despite the Omicron wave and has contributed to the US dollar’s rally.

The Fed had a hawkish message for the markets, sending equities lower but boosting the US dollar. Fed Chair Powell was careful not to get pinned down on a timeline for rate hikes, although the markets are betting on a  March lift-off. According to CME FedWatch, the likelihood of a 25-bps hike stands at 83%, with a 50-bps move increasing to 16%. The Fed was also vague about a date for reducing the balance sheet, with the FOMC statement noting that the reduction would start after the benchmark rate is increased.

Powell sounded hawkish during his press conference after the meeting, and as a result, equities were falling and US Treasury yields were rising as he was talking. Powell said that inflation risks remain to the upside in his view, and there is a risk that high inflation will be prolonged and could move even higher. The 10-year yield rose to 1.83% and moved slightly higher today before retreating.

Powell has been walking a tightrope, trying to assure markets that the Fed will bring inflation back below 2%, without being overly aggressive in tightening, which could cause a recession. Based on the panicky reaction from the financial markets after the Fed meeting, the Fed Chair has more work to do in reassuring the markets that the Fed is on the right path.

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 EUR/USD Technical

• EUR/USD continues to break below support lines and is testing below 1.1226. Below, there is support at 1.1152
• There is resistance at 1.1359 and 1.1418

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