USD surges, eurodollar collapses on FED hawkish stance

16 December, 2016

The USD dollar continued its march higher after the FOMC gave no reason to sell the dollar. Moves were sharp, the dollar gained significantly and that led to some historical moves on both currencies and interest rates. 

The EURUSD broke below 1.04 for the first time since 2003 and it looks that the parity is on the way. A clear technical break below 1.0450 (2015 lows) suggests that another leg down is getting started and that a move towards the magic bound at 1.00 is likely.

GBPUSD fell sharply a few minutes after 15:00 GMT as the USD strengtened further. Looking at the H1 chart it’s hard to find any reason for the pair to reverse in the near term.The sharp fall can be attributed to two factors: stronger USD and BOE’s decision. 

Bank of England has announced its decision on the shape of monetary policy: rates are left unchanged, the main one is still at 0.25%. The asset purchase target is still 435 GBP bn and the size of corporate bond QE is still 10 GBP bn. This was all widely expected. All these decisions were unanimous. However, a tone of the minutes suggested that Bank of England is less worried of overshooting the inflation target and that was seen as a dovish signal. 

The UK100 (underlying FTSE 100) has made a move higher in the past hour, with the market breaking above prior resistance at 6980. This could now be seen as possible support. In terms of resistance the all time high at 7090 is now exposed and becomes an important area to keep an eye on as we head into year end.

The Bank of Canada said a housing crash remains the chief risk to the country’s financial system, as dangers from the drop in commodity prices fade and the jump in global borrowing costs since Donald Trump’s election appears to be orderly.

 Looking ahead its an uneventful Asian session in terms of economic releases with Eurozone CPI at 10:00 tomorrow morning the next data point of note. US and Canadian data at 13:30 round off the week with building permits and housing starts in the former expected to fall slightly. 

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