Market Participants Saw the Fed as More Hawkish than Expected

The dollar has been in limbo since the end of August against the Euro, as both central banks are headed to further normalization especially as it pertains to the end of quantitative easing.  The Fed needs to tread carefully as it describes the process of quantitative tightening.  The market took the Fed move toward a reduction in the balance sheet as more hawkish than expected which led to a rally in the greenback. They were very specific with their description of quantitative easing and the markets believe the Fed will continue to be very transparent with its decision on accommodation normalization.

Fed Left Rates Unchanged

FOMC began its 2-day meeting on September 19, and was widely expected to announce the start of the balance sheet unwind, or quantitative tightening, which will amount to 600 billion dollars per month account to their statement released on September 20. Interest rate were left unchanged. This was a quarterly meeting that includes the release of economic and price forecasts and included a Yellen press conference. Of importance to the rate outlook is the dot-plot. The Committee was still expecting a total of three rate hikes this year at the June 13, 14 meeting, and they kept the door open for a tightening at the December 12, 13 meeting. Of the 16-voting members of the FOMC, 11 believe that it could be appropriate to change rates in December. The Fed did change its long-term forecast for interest rates, reducing it to 2.75% by 2020.

FOMC forecast revisions were released on Wednesday with the FOMC statement. Along with the dot plot, the forecasts revealed a bump in the 2017 GDP and PCE chain price estimates, alongside a small trimming in the high-end 2017 forecasts for the jobless rate and the PCE core price figures. At the June 13-14 meeting, the FOMC provided 2017 central tendencies of 2.1%-2.2% for GDP and 1.6%-1.7% for chain prices, and those ranges were lifted leaving them closer to 2.5% and 1.9%.

The Dollar Gain Traction Against the Euro Following the Fed Decision

The EUR/USD moved lower on Wednesday following the Federal Research report where the central bank left interest rates unchanged.  The Fed announced that they would move forward with quantitative tightening which would amount to approximately 600 billion in reduction in the balance sheet each year moving forward.

It appears that the currency pair is forming a topping pattern, as the interest rate differential moves in favor of the greenback. A chart on iForex would show this scenario unfolding. U.S. yields jumped across the curve with the 10-year yield hitting its highest levels since mid-August. Momentum on the currency pair remains negative as the MACD (moving average convergence divergence) histogram prints in the red with a downward sloping trajectory which points to a lower exchange rate.  The relative strength index (RSI) which is a momentum oscillator that measures accelerating and decelerating momentum, broke down, reflecting accelerating negative momentum, which also points to a lower exchange rate.