The EUR/USD major made a correction on Friday, coming down from the 5-month highs as the information of the Fed interest rate cut for the forecasted value slowly faded away. Looking at the chart, we can see that the pair traded between 1.1206 and 1.1343 at the end of last week, before deciding to close the session at 1.1269, meaning down 0.0047 or 0.42% against the opening price. With this minor loss, the Euro lost its 3-day gain spree in which it went up slightly over 1%. Looking back, the European currency gained 1.30% over the American counterpart in the last month and nearly 4% if we trace back to the beginning of the year. From a technical perspective, the new support is set at 1.0538 (the low of December, 3rd) and the resistance at 1.1496 (the high of October, 15th).
The FX investors passed through a hectic period in the last 10 days, with interest rate decisions coming out from 4 of the top central banks in the world.
Wednesday, the FOMC (Federal Open Market Committee) informed the public that they will cut the interest rate forecast for 2018 and sent the USD spiraling down to 5-month lows. The decision regarding maintaining the FFR (Federal Fund Rate) unchanged at 0.25%-0.50% for the time-being was explained through the increase in global financial risks and a soft tone in inflation. The year-end projection for the FFR was cut to 0.88%, meaning that there are to come two rate hikes for the remainder of 2016.
After a short-term interest rate hike in December (the first in almost ten years), the FOMC stated back then that they forecast that the rate will go up a least 4 times in 2016. Not so much time ago, the ECB (European Central Bank) stood up for its currency by approving a pack of stimulus measures which included an increase of the QE (Quantitative Easing) program funds and also a nudge deeper in the negative territory for the monetary policy rates.
Fed’s President, James Bullard, stated in a recent speech in front of the International Research Forum on Monetary Policy held in Frankfurt, Saint Louis that the depression in interest rates might be the cause of low inflation. Emphasizing the fact that the US has almost a full-employment grade and inflation (excluding the crude shock) is almost at its 2% target, Bullard explained that the policy currently backed-up by the FOMC is extreme. Right now, the FFR is almost 3% under the Fed long-run target, but the government’s balance sheet is over $3.5 trillion over what it was in the pre-crisis period.