EUR/USD in a Perilous State after the Fed’s Hawkish Hold and the ECB’s Dovish Hike

EUR/USD Analysis

The US Federal Reserve kept rates unchanged on Wednesday as widely expected, in what is viewed as a hawkish hold. It kept the door open to more tightening and confirmed the higher-for-longer narrative, since it maintained the 2023 median terminal rate projection that implies another hike and raised its expectations for the next year.

Its European counterpart was on the opposite direction last week, since it delivered its tenth straight hike, but hinted at peak rates, as it grapples with economic hardships, especially in Germany. The bank said that if the current levels are maintained for "a sufficiently long duration", will make a "substantial contribution" to the "timely return" of inflation to the 2% target. ^[1]

EUR/USD had dropped after the ECB decision and clinched new lows after yesterday's Fed announcement. The Euro's rate advantage has been eroding for a while and the latest round of meetings took things a step further, reversing the policy outlook. The pair is in perilous state, running another losing month and flirting with the pivotal 1.0611 (38.2% Fibonacci of the 2022 low/2023 high rise) that could open the door for new 2023 lows (1.0481).

On the other hand, European policymakers may have a hard time staying on the sidelines as inflation remains far from the 2% target, while the Fed may have already done enough given inflation moderation, massive amount of tightening and its lagging nature.

EUR/USD tries to find some reprieve today, defend the 38.2% Fibonacci and form a double-top. Successful effort may give it the chance to rebound, but does not inspire confidence under current conditions for moving above the confluence resistance at 1.0780-1.0800.