Forex snapshot

A Federal Reserve’s statement last night that tended towards the more hawkish end of the spectrum (or, at least, the less dovish) saw the euro and sterling drop sharply, with losses continuing this morning.

US dollar notes
Source: Bloomberg

The world without active Fed quantitative easing feels very much the same as it did when the Fed was actively practicing monetary easing. There is a temptation to see last night’s meeting as some sort of sea change in monetary policy, but the reality is that it was just another step along the road to the first increase in interest rates in the US (it would be unfair to use the word ‘hike’, since any rise is likely to be gradual).

It underlines the broad trajectory of monetary policy in the US, which is slowly heading towards a tightening of policy. By contrast, the Bank of England still looks undecided on the whole subject and the European Central Bank is heading firmly (if reluctantly) in the other direction. In such an environment, dollar strength is almost a given. This will be good for the ECB, since it pushes the euro down, but bad news in a way for the BoE, as a rising pound is one means of tightening monetary policy without actually raising the interest rate.

GBP/USD falls on lack of UK data

Sterling has fallen below $1.60 against the dollar, although it still sits close to a major support zone. Bereft of real data for the UK, the focus will remain on the US, which implies further downside for the pound in the longer term.

A daily close below $1.5950 would target the bottom from mid-October at $1.5890, and then we are forced to head back to the weekly chart to find effective levels.

Further declines would take us on a path to $1.5680, while the crossover of the 20-week moving average below the 50-week puts the currency pair on a very bearish footing.

A rally higher would head towards $1.60 first and then look to challenge the 200-hour MA at $1.6090.

Gloomy outlook for euro

With the euro heading below $1.26 again this morning, the target on the downside becomes the month’s low at $1.2510. The big event in eurozone data is still to come, with CPI and unemployment on tomorrow’s list, and while a drop in German unemployment provided one bright spot the overall picture still looks fairly gloomy.

Any moves upward are still likely to be capped by the 50-day MA at $1.2840, while the downturn in the daily RSI shows that buying pressure has more or less disappeared. 

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