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Apr 06 - 05:55 PM

EUR/USD - COMMENT-US Recap: Fed Minutes Soften Up EUR/USD Once More

By Paul Spirgel  —  Apr 06 - 03:30 PM

The dollar advanced on Wednesday, resuming its rise after minutes from the Fed's March policy meeting indicated, as expected, the FOMC's resolve to move forward with rate normalization and balance sheet reduction, extending U.S. rate divergence with other major economies.

Firming up policymakers' intention to clamp down on price growth, several members judged upside risk to inflation from the Ukraine war appeared more significant than downside risks to growth, while many would have preferred a 50bp hike at the March meeting.

The minutes portrayed an FOMC ready to begin balance sheet reduction as early as the May meeting, foreseeing monthly caps of $60bn for Treasury securities and $35bn for MBS would be appropriate, to be phased in over a period of approximately three months.

EUR/USD was ending U.S.
just above session lows at 1.0893.

With the Fed normalization program moving forward on the rate hike and balance sheet reduction fronts, diverging rate paths are likely to continue to move EUR/USD lower.

Barring a shift by the ECB away from its dovish stance, early March 2022 lows by 1.0806 are likely to be tested.

USD/JPY rose marginally after the Fed minutes, with yen weakness already well factored in following its steady weakening trend as the BoJ is not expected to hike rates any time soon.

Diverging rates could prod USD/JPY traders to target the 2022 high at 125.11 in short order.

GBP/USD slipped into the NorAm close as the divergence theme gears up sterling bears for a test of 2022 lows by 1.30.

The BoE’s shift to a more subdued rate hike path as growth concerns steal some of the spotlight from inflation fighting comes in contrast to the Fed’s increasingly hawkish view about removing accommodation.

AUD/USD continued to unwind Tuesday’s rally.
Though RBA rate hike expectations are rising, and expected to begin in June 2022, the Fed’s move to the balance sheet reduction phase of normalization trumps Australian hike expectations.

Wednesday’s move below 10-day moving average support by 0.7514 opens the way for a test of 21-DMA support by 0.7425.
Bears would gain momentum below 0.7413 the 50% Fib of the March-April rise from 0.7165-0.7661.

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Refinitiv IFR Research/Market Commentary


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