The Euro-Dollar pair today hit a 7-month low, reacting to the results of the September meeting of the Federal Reserve. For the first time since February of this year, the price has dropped to the lower boundary of the 1.0600 level (the lower Bollinger Bands indicator line on the D1 timeframe), approaching a support level. Although EUR/USD sellers couldn't impulsively break through this price barrier, the ball remains in their court due to Jerome Powell's hawkish rhetoric.
It's worth noting that the formal outcomes of the September meeting coincided with market expectations. The Federal Reserve implemented the basic and most probable scenario, keeping the interest rate unchanged. According to the CME FedWatch Tool, the market estimated the likelihood of maintaining the status quo at 99%. Therefore, the realization of this scenario did not have any significant impact on traders. However, the updated dot plot and the rhetoric of the Fed Chairman triggered price turbulence across all dollar pairs, and EUR/USD was no exception.
In a nutshell, the market received two signals from the American regulator. The first signal is that the central bank is likely to raise the interest rate by the end of the year. The second signal is that the central bank has no plans to lower the rate in the foreseeable future. These messages provided support to the greenback, with the U.S. Dollar Index returning to the 105 level.
The updated dot plot played a significant role on the side of the American currency. The diagram, reflecting individual expectations of Federal Reserve members, showed a hawkish sentiment within the central bank. It became known that 12 out of 19 central bank leaders expect another rate hike by the end of the current year, in November or December.
Commenting on the formal outcomes of the September meeting, Fed Chairman Jerome Powell stated that it is currently too early to say that the interest rate has reached its peak. The Federal Reserve has pressed the pause button but has not concluded the current cycle of monetary policy tightening. Powell noted that most Federal Reserve members believe that "another rate hike is appropriate by the end of 2023" (which is generally in line with the updated dot plot). At the same time, he clarified that the rate is "close to where it needs to be," but the Federal Reserve still needs "convincing signals that inflation in the United States is under control."
In other words, the American regulator left the door open for another round of monetary policy tightening this year, thereby providing support to the dollar, which will now hold its ground thanks to growing hawkish expectations.
Ironically, the ECB sank the euro in September by raising interest rates, while the Federal Reserve provided support to the greenback by maintaining the status quo. It is understood that the difference lies in the further prospects for policy tightening (the European regulator hinted at keeping rates at their current level and is unlikely to resort to another hike), but the fact of this "mirror reaction" cannot be ignored.
However, the dollar received support not only due to the Federal Reserve's hawkish intentions of a declarative nature. Another important signal received by the market is that the Federal Reserve does not plan to ease monetary policy in the foreseeable future.
Initially, Powell stated that he does not intend to signal the timing of a rate cut because there are "too many uncertainties" to answer that question. However, he eventually acknowledged that within 2024, this question might be considered ("at some point, it will be time to lower the rate"), but the exact timing cannot be determined. At the same time, the Fed Chairman indicated that in the near future, in the perspective of the coming months, the topic of rate cuts is unlikely to be on the agenda.
By the way, according to the aforementioned updated dot plot, Federal Reserve members plan to reduce the rate by 50 basis points next year, while the July dot plot implied a 100-point reduction over the course of 2024. This factor also played in favor of the greenback.
Overall, Jerome Powell's rhetoric had a decidedly hawkish tone. For instance, he stated that the growth of the U.S. economy "turned out to be stronger than expected, and this fact contributes to rate hikes amid high inflation." He also noted that the rise in energy prices, which appears likely to be sustained, could affect inflation.
As mentioned earlier, the EUR/USD pair, reacting to the results of the September meeting, dropped to the 1.0600 support level, which is the lower boundary of the 6-figure range on the D1 timeframe. However, traders hesitated to breach this level. Moreover, during the European session on Thursday, buyers managed to regain some of their lost positions.
The Federal Reserve essentially tied its actions (or more precisely, one action – a rate hike) to the dynamics of inflation growth. According to Powell, the Fed's next steps will be based on a combination of all data. This means that the upcoming inflation releases (Consumer Price Index, core PCE index, Producer Price Index) for September and October will be crucial in the context of the November meeting. There are certain prerequisites for overall inflation to rise (primarily due to the increase in the oil market), but it is still premature to confidently assert that the Fed will raise rates in November. According to the CME FedWatch Tool, the probability of a 25-point scenario being realized at the November meeting is currently only 30%.
This is why EUR/USD sellers are not rushing to storm the 1.0600 target, and traders need to establish themselves below this level for the continuation of the downward trend. Given that the initial downward impulse has faded, it is currently not advisable to consider short positions. To enter into sales, it makes sense to use corrective pullbacks as they approach the boundaries of the 7-figure range (the nearest resistance level is the Tenkan-sen line on D1, corresponding to the 1.0690 level). In such a scenario, the target of the downward movement would be the 1.0600 support level.