EUR/USD: the euro falls to $0.98 after the Fed

Fed drives EUR/USD to new low

The price of EUR/USD fell to a new low at 0.98 following the particularly hawkish tone of the Fed yesterday. The Committee admittedly raised its rates by 75 basis points as expected last night, but at the same time revised its rate projections for 2023 sharply upwards and downgraded its economic outlook.

The FOMC now expects to reach and hold its benchmark rate at 4.6% through the end of next year as traders expected two rate cuts in the second half of 2023. Additionally, the FOMC has significantly revised its economic projections downwards, now forecasting near zero growth this year.

Quite exceptionally, the Fed also affected its credibility yesterday by forecasting a slowdown in inflation thanks to its restrictive monetary policy, without causing a jump in the unemployment rate. The Fed expects to slow inflation while limiting the rise in the unemployment rate to 4.5%. This is an extremely optimistic and highly unlikely scenario if history is any guide.

EUR/USD is under pressure from this particularly hawkish tone from the FOMC last night, but all eyes are now on the Bank of England this afternoon, which is in turn expected to raise rates by 75 basis points, and on September’s flash PMIs published throughout the day.

The BoE and PMIs could provide support for EUR/USD in the event of a 100bp rate hike and/or a higher than expected PMI. Conversely, the absence of a hawkish surprise from the BoE or above-expected PMIs would increase the pressure on the exchange rate.

EUR/USD daily price chart – key levels


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