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EURUSD

The EURUSD had a strong bullish momentum yesterday topped at 1.0740. The bias is bullish in nearest term testing the daily EMA 200 located around 1.0830 area which is a good place to sell with a tight stop loss. Immediate support is seen around 1.0685. A clear break below that area could lead price to neutral zone in nearest term testing 1.0630/00 support area. Overall I remain neutral.

GBPUSD

The GBPUSD had a bullish momentum yesterday topped at 1.2308 after another failure to make a clear break below 1.2135 key support as you can see on my daily chart below. The bias is bullish in nearest term especially if price able to make a clear break above 1.2300 testing 1.2400. Immediate support is seen around 1.2225. A clear break below that area could lead price to neutral zone in nearest term testing 1.2175 but key support remains at 1.2135. Overall I remain neutral.

USDJPY

The USDJPY had a bearish momentum yesterday bottomed at 113.16. The bias is bearish in nearest term testing 112.50 area. Immediate resistance is seen around 114.00. A clear break above that area could lead price to neutral zone in nearest term as direction would become unclear. On the downside, a clear break and daily close below 112.50 would expose 111.50/30 key support which is a good place to buy with a tight stop loss

USDCHF

The USDCHF had a strong bearish momentum yesterday bottomed at 0.9984. Price broke below the bullish channel as you can see on my H4 chart below suggests a bearish outlook testing 0.9950 – 0.9870 support area. Immediate resistance is seen around 1.0050. A clear break back above that area could lead price to neutral zone in nearest term as direction would become unclear. Overall I remain neutral.

The Fed disappointed with dovish statement

The USD dropped versus majors after the much anticipated rate hike at the end of the March Federal Open Market Committee (FOMC). The Fed raised rates by 25 basis points as expected, but did not alter economic projections and Fed Chair Janet Yellen was less hawkish than the market expected given her comments in the buildup to the policy meeting.

A week filled with central bank activity continues with the Bank of Japan (BOJ) policy rate in overnight trading to be followed by the Swiss National Bank (SNB) on Wednesday, March 16 at 4:30 am EDT (8:30 GMT) and the Bank of England (BoE) to publish its monetary policy summary at 8:00 am EDT (12:00 GMT).

The BoE is forecasted to keep the interest rate and QE amounts unchanged. Higher inflation mostly driven by food and energy prices will give fodder to the hawks that will be reflected in the minutes of the meeting published at the same time as the statement. Brexit anxiety is high with the U.K. government planning to trigger Article 50 on Tuesday will be on the minds of BoE members as Scotland is calling for a second independence referendum within a two year time frame.

The EUR/USD gained 0.622 percent in the last 24 hours. The single pair is trading at 1.0682 after the U.S. Fed raised the benchmark interest rate by 25 basis points as was expected. Members of the Fed cautioned the market that its views on the March FOMC meeting were offside back in February which was a strong hint a rate hike was coming. The EUR/USD had already priced in the telegraphed rate decision, with investors keeping a close eye on the economic projections and press conference with Chair Yellen.

The USD lost traction as the rate statement, economic projections and Yellen’s comments were less hawkish than expected given the guidance given by the Fed ahead of the March meeting.

The EUR was not able to appreciate as much as other majors on the eve of the Dutch elections. The uncertainty around the result has put a downward pressure on the currency given the probability of Freedom Party candidate Geert Wilders’ victory. Brexit and U.S. election’s polls have steered markets wrong in the last 9 months so its no surprise investors are anxious about the result. A Wilders win could pave the way for more far-right victories in particular looking ahead at the French elections in April.

The USD/JPY lost 1.04 percent on Wednesday’s trading session. The currency is trading at 113.52 after the release of the FOMC rate statement. The USD was on the cusp of breaking the 115 price level ahead of the announcement, but is near session lows at 113.52 as the Fed maintained its economic forecasts despite growing optimism about the U.S. economy elsewhere.

During the press FOMC press conference Fed Chair Janet Yellen was asked if members discussed the possible Trump administration policies such as tax cuts and infrastructure spending and she said they did not discuss them and will not do so until there are more details. The Fed has hiked once every year since 2015, but this year the hike came sooner than the market originally expected. Fed members had to drop heavy hints about their plans as they moved into a more proactive dynamic. The market was reading proactive as hawkish, but Yellen’s words have downplayed that particular reading as the Fed will not set a schedule for its monetary policy tightening leaving up the economic data to decide putting again the onus on the Trump administration to boost the USD.

The GBP/USD gained 1.08 percent in the last 24 hours. The pound gained after the Fed raised rates as expected but also signalled lack of urgency in future rate decisions. The pair is trading at 1.2287 after the Fed announcement looking ahead to the Bank of England (BoE). The BoE is expected to keep rates and QE on hold and continue its dovish outlook.

Market events to watch this week:

Wednesday, March 15

Tentative JPY BOJ Policy Rate
Tentative JPY Monetary Policy Statement
Thursday, March 16
2:30am JPY BOJ Press Conference
4:30am CHF Libor Rate
4:30am CHF SNB Monetary Policy Assessment
8:00am GBP MPC Official Bank Rate Votes
8:00am GBP Monetary Policy Summary
8:00am GBP Official Bank Rate
8:30am USD Building Permits
8:30am USD Philly Fed Manufacturing Index
8:30am USD Unemployment Claims
Friday, March 17
8:30am CAD Manufacturing Sales m/m
10:00am USD Prelim UoM Consumer Sentiment

Hike 'does not represent a reassessment of the economic outlook'

The overall message from the meeting was that the Fed is on track and delivered one of the three hikes it projected back in December 2016 - the Fed has not become more hawkish. This was in line with our expectation, see also FOMC preview.

In her opening remark, Fed Chair Yellen said that the decision to hike 'does not represent a reassessment of the economic outlook' but reflects the 'continued progress toward' full employment and 2% inflation.

Yellen also noted that the median 'dots' were 'essentially unchanged' from the last projections in December (see slide 4). The dots still signal three hikes in both 2017 and 2018. It is worth keeping in mind that the Fed is data dependent and will not hike unless data support the case, which it showed last year.

There were no major changes to the FOMC statement. The most important change was that it stated the inflation goal is 'symmetric', which we interpret that the Fed still wants inflation to move higher and does not mind if it overshoots the target a bit (although not persistently).

Yellen repeated that she estimates the current level of the real Fed funds rate is around 0%, meaning that a total of four hikes would be one too many this year, as it would make monetary policy neutral instead of accommodative. She expects it to move to 1% in coming years (3% nominal).

We expect the Fed to hike twice more this year (July and December) and three-four times next year. We expect the Fed to begin the reduction of its balance sheet in Q1 18 (see also slide 5).

Fed still awaits more information about 'Trumponomics' and previous meetings have revealed that 'almost all' FOMC members think there are upside risks to growth due to the expectations of more expansionary fiscal policy.

Perhaps we will get more information tomorrow when Trump's budget proposal for fiscal year 2018 is expected to be published. Note that the US debt limit suspension expires today, see also Research US: Debt limit suspension expires

Markets were positioned for a more hawkish Fed

EUR/USD bounced on the announcement

As some expected a more hawkish stance from the Fed, we saw a repricing of the Fed after the meeting, as the Fed did not raise the median dots for this year and next year, still signalling three rate hikes in both. Markets now price 1.6 hikes for the rest of this year and a total of 3.6 hikes before year-end 2018 (versus 1.7 and 3.9 yesterday).

EUR/USD bounced on the Fed announcement and the exit poll from the Dutch election showing PM Rutte'sVVD becomes the biggest largest party (31 seats versus 19 seats to Wilder's Freedom Party). Technically, short-term momentum indicators for EUR/USD are turning bullish and we could see a near-term move to the upper end of the recent 1.0350-1.0850 range.

We view that relative rates are slightly EUR/USD bearish, as the market has turned too hawkish on the ECB pricing in a 10bp rate hike by March 2018, while the Fed is slightly underpriced.

However, other factors such as valuation and the record-high eurozone-US current account differential are clearly EUR/USD bullish.

Hence, EUR/USD is in our view currently forming a base and we expect a gradual move higher later in the year forecasting the cross at 1.12 in 12 months.

Fed maintained 'dot' signal at three hikes per year

The Fed discussed 'eventual change to reinvestment policy'

Weexpect quantitative tightening to begin in Q1 18

FOMC members have become more vocal on their desire to reduce the Fed's balance sheet in recent months and Yellen said in her opening statement that the Fed discussed 'a number of issues related to an eventual change to our reinvestment policy', which means we have to look out for this in the minutes.

In the statement, the Fed maintained its current strategy that it will continue to reinvest until the normalisation of the Fed funds rate is 'well under way', which seems to be when it is around 1.50% (half of the Fed's estimated neutral rate at 3.00%), although Yellen said that it was a more 'qualitative' statement than 'quantitative'.

We think the Fed will begin the reduction in Q1 18. An NY Fed survey shows that primary dealers expect it to begin a bit later in mid-2018.

Read also Research US: Fed's regulatory hurdle for starting quantitative tightening, 13 March

For the U.S., economic policy takes on both a domestic and global context. We are a large country in the economic world and our actions have global implications—never more true than with monetary policy.

Rising Rates and The Dot Plot Projections

As expected, the FOMC did raise the fed funds rate target 25 basis points at the meeting today. The median expectation for 2017 remained at three rate hikes, which also remains our forecast. The dots showed 2018 and longerrun projections unchanged, while the median projection for 2019 rose slightly (top chart).

The FOMC, by taking on a preemptive policy action in March, avoids the complication that a surprise French election result or other unforeseen event might upend a June rate hike. A March rate hike puts in place an easier path for the FOMC to raise rates three times in 2017, particularly given that Chair Yellen's term ends in February 2018.

Meeting Its Goals: A Question on Inflation and a Fog

The minimal changes in the Fed's dot plot projections were reflected in the economic forecasts. Real GDP growth was left unchanged throughout the forecast horizon with the exception of a 0.1 percentage point upward revision to 2018. In regard to inflation, the projection for the core PCE deflator rose by 0.1 percentage point in 2017; otherwise, the median inflation projections remained unchanged. Inflation, as measured by the PCE deflator, is moving higher but remains relatively tame (middle chart). Meanwhile, in our view, the FOMC's full employment target has been more or less met. One of the three FOMC policy pillars is that policy should look forward. We expect the FOMC to work on this pillar as an improving economy pushes inflation toward the Fed's two percent goal.

The Fed's longer-run median projection for the neutral fed funds rate is three percent; with a two percent inflation target, the real long-run fed funds rate is implicitly one percent. Such a low real funds rate indicates something about potential growth that may not be consistent with the goals of the current administration.

Dollar/Growth and Rates Interactions

U.S. rates serve as the benchmark for global investors as changes in U.S. rates alter yield spreads between sovereign debt returns as well as defining exchange rate risk between countries. With out-of-sync economic cycles, the actual and expected interest rate/growth differentials for the U.S. support the case for the dollar's increase in value over the last six months (bottom graph) as well as a further increase over the next six months.

Other central banks around the world are challenged. Since the ECB and BOJ are not in a position to raise rates, actions by the Federal Reserve will not be followed and thereby the dollar's exchange value rises. This will promote financial capital outflows. China is in a more difficult situation since a stronger dollar would increase bilateral trade imbalances and incentivize further capital outflows–difficult results in today's context.

• All but one dovish dissenter voted for today's rate increase.
• The statement remained upbeat on the economy, noting moderate growth, solid job gains, rising consumer spending and firming business investment.
• There was no change in forward guidance on interest rates or the Fed's reinvestment policy.
• Median economic projections and the 'dot plot' were little changed, the latter amid some expectation that the Committee might see a slightly faster pace of rate hikes as appropriate next year.

Our Take:

A favourable assessment of current economic conditions and confidence that the outlook remains bright underpinned Chair Yellen and her colleagues' decision to raise the funds target by 25bps. This marked the third rate hike this cycle and the shortest period between increases at just three months. The FOMC remains confident that the economy will continue to grow, labour market conditions to tighten somewhat further and inflation to stabilize at its 2% objective even as they gradually raise the policy rate. This confidence was evident in the forecast supplied with the statement that showed the median growth forecast at 2.1% in both 2017 and 2018 - solidly above the 1.8% longer run estimate - even with policymakers anticipating another two rate hikes to be delivered this year and three next year. Once again, the statement made no mention of any lift from fiscal policy suggesting upside risks to the Fed's forecast should the Trump Administration deliver on their campaign promises of tax cuts and lighter regulations.

We remain confident that the US economy will grow at an above-potential pace. Early data for the first quarter points to growth running at about a 2% annualized pace - enough to exert further downward pressure on the unemployment rate. However, given the elevated level of uncertainty about the direction of fiscal policy, the Fed is likely to keep on the path of gradual rate hikes. A dose of stimulus with the economy already running close to its speed limit could be a recipe for a faster-than-desired pickup in inflation and require a more aggressive response by the Fed. However until there is clarity on the Administration's game-plan, the Fed's strategy will remain the slow and steady removal of accommodation.

EURUSD - The pair rallied strongly to reverse its two-day losses on Wednesday. On the upside, resistance comes in at 1.0750 level with a cut through here opening the door for more upside towards the 1.0800 level. Further up, resistance lies at the 1.0850 level where a break will expose the 1.0900 level. Conversely, support lies at the 1.0650 level where a violation will aim at the 1.0700 level. A break of here will aim at the 1.0750 level. Its daily RSI is bullish and pointing higher suggesting further upside. All in all, EURUSD faces further upside pressure.

The Federal Reserve this morning raised its benchmark interest rate a quarter of a percent from 0.75% to 1.00%.

'Our decision to make another gradual reduction in the amount of policy accommodation reflects the economy's continued progress. Today's decision is in line with that view, and does not represent a reassessment.'

Basically, traders remain optimistic because this basically signals that there wont be any surprises or variations from the Fed's dot plot, signalling that three hikes this year in total is actually going to happen.

The US Dollar was obviously positioning itself further to the side of caution and the huge drop (or rally in the majors like EUR/USD) shows the repricing as the market comes back in line with reality. Buy the rumour, sell the fact happening right in front of your eyes.

It sums up modern day central bank economics in trading forex markets, when the market does exactly the opposite of what the textbook says it should do, all because of how the market is priced heading into the decision or release.

Moving onto the charts and on the blog back in the first week of march, we had been watching this major EUR/USD support level that I've quoted here with my thoughts at the time:

EUR/USD 4 Hourly:

So as you can see, we have a pretty obvious support level at the bottom of the chart thanks to that juicy double bottom.

Both touches of the level come within just a 6 pip zone and more importantly, both touches of the level were met with immediate buying to push out of the level HARD.

As we've spoken about above already, the market being cautiously positioned meant that when the Fed hiked, the USD got smashed and as a result, EUR/USD was a major winner:

EUR/USD 4 Hourly:

A major winner that just happened to be positioned nicely above higher time frame support and continuing to be bought on every short term technical pullback as a result.

'Carry on', my wayward markets…

The FOMC decision lived up to its stormy expectations, but seriously wrong-footed the markets and gutted dollar long position as dollar bulls found themselves hitting the reboot button.

Let's face it – it was hard to envision much more Fed tightening in the near-term, with the market leaning three hikes in 2017 and pricing in a 2 in 2018. But the ever-present speed bump, Dr Yellen, delivered a baseline of at least two hikes this year, but probably three, focusing the markets on the Summary of Projections, primarily the nefarious dot plots. The first words I heard down the squawk were, 'so what are we going to do now?'.

Little changed in the Fed's policy outlook from that communicated in December, so the trading decision was easy, as EM FX roared back to life setting the stage for the AUD to shine and, in predictable fashion, the USDJPY rolled over.

The absence of any observable hawkish guidance from the Fed will leave the Greenback under pressure near term. USDJPY ingested most of the initial move, but the response from AUD, NZD and EM traders suggest the market will be in 'carry on' mode for the foreseeable future.

Australian Dollar

So much for the month-long market repositioning amid concerns that the Fed was looking to push US rates higher at a much faster pace, boosting the likelihood of the divergence in monetary policy between the US and G10 currencies.

Aussie dollar traders were quick to tap the reset button as whatever silly arguments we were making for a lower AUD went out the window, as it became apparent that not only is now a good time to unwind shorts, but it is likely a good opportunity to get some carry-on.

The dove, Yellen, in one comment, 'the data have not notably strengthened”, made the markets a safe place to extend risk at least until June anyway.

As we find ourselves back in the AUD death valley at .77-.7750, the speed of the move has me erring in buy on dip mode, as opposed to chasing this initial move, especially ahead of the employment data. But I suspect the all clear signal from the Feds bodes well for AUD, where I would expect the carry appeal to have a more lasting effect on the Dollar bears.

The Australian Employment data came in at -6.4 K vs. +16.K while Unemployment rates at 5.9% vs. 5.7 % suggest a clear out of freshly minted longs. But given the unpredictability and huge variance in this data point, I expect the Aussie to remain supported on dips

G-3

The less hawkish tone from the Fed also boosted Europe's single currency, and the JPY strengthened against the USD to 113.15 before the buck recovered. While the Yen move is a USD bond driven, the EURO looks to be a more interesting setup.

With EUR refusing to concede 1.05 despite Fed hikes, US Treasury selloff, European election risks, ECB extending bond buying program and Trump's talks on fiscal, the Euro may end up being the biggest beneficiary of the Dovish Fed. With near-term political risk fading and the chance that Draghi could reinforce his surprisingly hawkish tenor of late, the Euro may be poised to make some significant headway despite the lingering risk of the French election.

EM Asia

So much for the market fearing a hawkish Fed. Dr Yellen's delivery couldn't be anymore dovish, with the Fed view back to a baseline of at least two hikes. It is all but an open invitation to buy EM, equities, commodities and re-engage the carry trade as the Fed has greenlighted risk for the foreseeable future. Forget a May hike and look for June to fade at the slightest hint of softer US economic data.

As expected, the Federal Open Market Committee (FOMC) announced an increase in the federal funds target rate of 0.25 percentage points to a range between 3/4 to 1 percent.

The Committee's assessment of the economic outlook noted ongoing progress toward the Fed's dual mandate. The unemployment remained little changed and inflation moved "close to the Committee's 2 percent longer run objective." The statement did note that core inflation was little changed and remained below 2 percent.

The summary of economic projections (SEP) released with the statement was largely unchanged. Expected economic growth edged up 0.1 percentage points to 2.1% for 2018, according to the median measure. The longer-run unemployment rate edged down 4.7% (from 4.8%). Inflation, as measured by the personal consumption expenditure (PCE) deflator, was unchanged, but core PCE inflation expectations edged up to 1.9% (from 1.8% previously) in 2017.

The median "dot" projection of FOMC members remained unchanged for both 2017 and 2018, but edged up 12 basis points to 3.0% from their December expectations.

There was one dissenter at the meeting, Neel Kashkari (President of the Minneapolis Federal Reserve Bank), "who preferred...to maintain the existing target range for the federal funds rate."

Key Implications

The FOMC's decision to raise interest rates was telegraphed in advance and well-anticipated by financial markets. The FOMC dots - members' expectations for future policy rates - was the real focus of this announcement. The dots showed a coalescing in the opinion of Fed members around expectations for three hikes in 2017 and 2018, but no significant change in the median projection. So, the Fed is a bit more confident, but no more hawkish than it was in December.

The Fed's statement seemed to say mission accomplished on inflation, taking out its expectation that inflation would "rise" to target, but rather "stabilize" around it. It also noted that it would monitor "inflation developments relative to its symmetric inflation goal."

With continued progress toward the dual mandate, there is good reason to expect rates to continue to rise this year. However, flanking this view are considerable risks on both the upside and downside. On the upside, a more expansionary fiscal policy would likely cause the Fed to move faster than currently anticipated. On the downside, a bout of financial instability or heightened political uncertainty (either global or domestic) could stymie current economic progress and set the Fed back.

Dollar drops sharply after Fed hikes federal fund rates by 25bps to 0.75-1.00% as widely expected. The disappointment comes from effectively no upward revision in the projected rate path. The median projection of federal fund rates was held at 1.4% by the end of 2017, same as December projection. Median projection for rate by the end of 2.18 was held at 2.1%, also same as December projection. Median projection for rate by the end of 2019 was revised by a mere 0.1% to 3.0%.

The range of projection for rate was also held unchanged. That is, 0.9-2.1% in 2017, 0.9-3.4% in 2018 and 0.9-3.9% in 2019. Nonetheless, and admittedly, the central tendencies were revised up. Central tendency for 2017 was revised up from 1.1-1.6% to 1.4-1.6.%, for 2018 from 1.9-2.6% to 2.1-2.9%, for 2019 from 2.4-3.3% to 2.6-3.3%.

Looking at other projections, real GDP growth for 2018 was revised slightly up from 2.0% to 2.1%, and unchanged for 2017 and 2019. Unemployment rate projection was held unchanged. Core PCE projection for 2017 for revised up fro 1.8% to 1.9%. But for 2018 and 2019, core PCE projection was held unchanged.

Also, it should be noted that the decision was not unanimous. Neel Kashkari voted to keep interest rate unchanged.

Dollar index responded by dropping sharply after the announcement. The index is back pressing 101 handle. The key will lie on 100.66 near term support, which is now the level to watch. Break will possibly send the index through 99.23 low to extend the corrective pattern from 103.82.