Euro dips to 3-week low as Fed trims

The euro is down considerably in Thursday trade. Currently, EUR/USD is trading at 1.1550, down 0.53%. Earlier in the day, the euro fell to 1.1528, its lowest level since October 13^th.

Fed tapers, but sticks to ‘transitory’ script

There were no surprises from the Federal Reserve meeting, as policy makers trimmed the QE programme by 15 billion dollars/month. The move was nonetheless highly significant, as it marks the first tightening in policy since QE was introduced as a response to the economic downturn in early 2020 due to the Covid pandemic. Although the move was communicated to the markets in advance, it was unclear as to how much the Fed would trim, and an amount other than 15 billion dollars could have shaken up the US dollar.

The Fed’s move was aptly described as a ‘dovish taper’, in that the Fed continues to maintain a dovish stance as far as future rate hikes and inflation. Fed Chair Powell said after the meeting that the bank would remain patient and wait until the job market was stronger before raising rates, emphasising that the Fed would encourage job growth through low rates. As for inflation, Powell stuck to his well-worn script that the current bout of high inflation is “expected to be transitory” and will ease lower. Powell appears to be odds with the markets, which are far more hawkish and have priced in several rate hikes for 2022. Inflation has been running at 4% over the past five months (double the Fed’s target) and it’s becoming a stretch to argue that this is a transitory trend, with no sign that inflation will cool anytime soon.

What is interesting is that other major central banks are also preaching patience and arguing that high inflation is transitory. Earlier today, the BoE surprised the markets by maintaining rates; the BoE had signalled that it would raise rates in order to contain inflation. However, the BoE echoed the Fed when it stated today that the factors causing high inflation were transient and that it expected inflation to ease in several months. The ECB is also singing from the same hymn sheet – the bank has projected that inflation will be “subdued” in the medium term, and earlier in the week, ECB President Christine Lagarde said that the bank had no plans to raise rates in 2022.

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EUR/USD Technical

• There are resistance lines at 1.1658 and 1.1754
• 1.1501 is providing support. This line has held since July, but was under pressure earlier in the day. Below, there is support at 1.1440

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