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The Fed blinked! What’s next

USD: The Fed disrupted calm markets with a more hawkish narrative then was expected. There was an upgrade to interest rate projections (now 50bp of tightening expected in 2023) but important question marks have been raised on the extent to which the inflation overshot is temporary. This also suggests that the QE tapering discussion could start a little earlier than thought and conclude more quickly. This means that all the focus will be on the Jackson Hole conference in late August as a possible date to formally acknowledge the need to taper. The dollar clearly benefited from the shift in the FOMC bias and rallied across all FX. After the Fed’s shift yesterday, expect the dollar sensitivity to US data releases and Fed-speak to increase.

CAD: The Fed certainly surprised with a hawkish tilt yesterday, not in terms of language, but the economic projections did say a lot. That has the potential to shake up the dollar narrative going into the summer and for USD/CAD, that presents a rather interesting twist of fate after the downside run so far. The CAD remains most stretched against the dollar and with sentiment in the greenback perhaps starting to turn. For the USD/CAD, the break back above 1.2200 now sets the stage for a move towards the 100-day moving average (red line) @ 1.2427.

EUR: In line with the general trend, the euro got a hit from the Fed meeting yesterday. With the Fed moving towards policy normalization a little faster than initially expected, EUR/USD may struggle to hit the 1.25 target this summer. With EUR/USD breaking below the 200-day moving average support level of 1.1997, the near-term risks are clearly skewed to the downside.

GBP: GBP/USD price action had already been on the ropes in the past few days leading to the FOMC decision but yesterday may be the straw that breaks the camel's back. From a technical perspective, buyers did hang on for a while at 1.4100 but now with a break back below 1.4000, there isn't much in the way of a move to the 100-day moving average (red line) @ 1.3933 next. For now, the post-FOMC reverberations are continuing and with the dollar finally breaking out of consolidation range for most pairs in the past month, these moves should play out for a while. Looking at the bigger picture, it will come down to how much does the market see yesterday as a major point in the timeline towards the Fed tightening policy.

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