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Dec 14 - 05:55 PM

EUR/USD - COMMENT-US Recap: EUR/USD Rebounds After Hawkish Fed Leaves Markets Skeptical

By Randolph Donney  —  Dec 14 - 03:40 PM

The dollar index fell on Wednesday, losing a brief rebound that followed an increase in the Fed's inflation and rates forecasts as markets appeared to doubt the U.S. central bank's ability to follow through fully on its hawkish rhetoric.

Markets appeared suspicious that the Fed's aggressive rhetoric was an attempt to prevent an easing of financial conditions that could undermine its inflation fight, even after it raised rates by 50bp, a step-down following four 75bp increases but still a large move by historical standards.

Policymakers' revised up their year-end fed funds projection to 5.1% nL1N3331I0 but the market continued to price in a sub-5% terminal rate in 2023, with futures also projecting a roughly 50bp fall in borrowing costs from their peak by next December.

EUR/USD initially fell back from its 6-month highs at 1.0684, but then rebounded to a new 1.0695 high for a 0.3% gain, holding above the resistance it cleared after Tuesday's below-forecast U.S. CPI slammed the dollar.

Sterling rose 0.5% after its fleeting Fed announcement retreat from its earlier 6-month peak at 1.2445.
The risk-sensitive pound was briefly impaired by the risk-off response to the more hawkish than expected Fed news.

USD/JPY was modestly lower following the initial spike up to its 135.99 Wednesday highs on EBS.

Fed Chair Jerome Powell acknowledged the welcome reduction in October and November inflation, but drove home the upside inflation risk from ongoing tightness in labor nW1N30T050.

A fifth consecutive drop in U.S. import prices reported on Wednesday nL1N334108 may help keep markets leaning against pricing back in a higher Fed terminal rate.

Ahead of the Fed, the dollar had already erased the gains it had accumulated following the Fed's four consecutive 75bp rate hikes since June nL1N334156, leaving potential selling pressure at a lower level.

Reuters reported in an exclusive that the ECB sees inflation above target through 2025 nL8N33362R, prepping traders for a hawkish bias from Thursday's meeting of the European Central Bank.

Double-digit UK inflation rates edged lower in November nL8N334153, but not enough to reduce BoE rate hike expectations, or of Fed rates falling below the BoE's by end-2023 nL1N3341BF.

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Refinitiv IFR Research/Market Commentary


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