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EUR/USD jumps despite hawkish Fed

The USD failed to capitalize on a hawkish Fed, what happens next?

The greenback failed to hold yesterday’s gains and was sold-off notably on Thursday, pushing the EUR/USD pair back above the 1.17 threshold, erasing all the post-FOMC gains.

Fed turns hawkish

Wednesday’s FOMC decision brought a hawkish surprise and caught some investors off-guard. The Fed appears ready to start tapering in November , although they did not confirm November as the GO month. Instead, the statement read: “a moderation in the pace of asset purchases may soon be warranted,” meaning it should begin in November or December.

Additionally, the tapering process is now expected to end in July 2022 – a relatively quick process, considering the recent weakness in the labor market.

Regarding interest rates – the FOMC is now split 9-9 whether to raise rates next year. Thus, 9 participants want to start the so-called lift-off next year , probably due to the soaring inflation. As a result, only one FOMC member doesn’t expect a rate rise by the end of 2023, a substantial change from just six months ago.

On the whole, the Fed meeting was another move in the “more hawkish direction.” even if the bank clarified that “this is still a very dovish Fed that is highly committed to achieving higher inflation and a hot economy. But in the face of supply-side constraints and growing signs of persistent inflation, it appears that those objectives could be met earlier, BofA chief economist Michelle Meyer said post FOMC.

As previously said, the USD strengthened after the FOMC decision but gave up all gains on Thursday.

EU data disappoint

Given the very weak German (and EU) data this morning, the euro’s resilience is even more surprising.

German services PMI for September fell to 56 from 60.8 in August, while the manufacturing sector dropped to 58.5 from 62.6 previously , suggesting a weak end of the third quarter in the eurozone.

Additionally, the eurozone’s services sector slowed notably, from 59 to 56.3, and the manufacturing PMI declined to 58.7, from 61.7 scored in August.

Detail of USD and EURO banknotes Detail of USD and EURO banknotes, Source: shutterstock.com

US data in focus now

Later in the day, the usual Thursday’s jobless claims will be released. Initial claims should improve further to 320,000 from last week’s 332,000. Meanwhile, continuing claims are expected to slide a bit to 2.65 million, from 2.665 million scored in the previous report.

Additionally, the US Markit manufacturing PMI for September is due, forecast to improve to 62.5 versus 61.1 recently, while the services sector is also expected to rise to 59.5, from 55.1 in August . That would be a big divergence between the EU and US data (as EU data deteriorated notably and US data are expected to improve notably), possibly supporting the bearish case in the EUR/USD pair.

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