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The Euro breaks lower once the Fed raises rates

  • EUR/USD breaks 1.1500 and both long-run averages after the Fed hikes.
  • Fed raised rates to 3.75-4.00% this afternoon, the ECB to 2.50% six days earlier.
  • Pair trades under its 50-day and 200-day averages, six pips apart.

The Euro (EUR) trades just under 1.1500 against the US Dollar (USD) on Wednesday, through the pair of long-run averages that had held it up since early August. Both central banks in this pair have raised rates inside a week, by the same quarter-point each, so the distance between them is exactly where it started. What moved today was not the gap. It was the published view of where the American half of it goes next.

Two quarter-points that cancel, and one that does not

The European Central Bank (ECB) went first, taking its deposit rate, the return banks earn on money parked with it, up to 2.50% last Thursday. The Fed matched the size this afternoon and went to 3.75-4.00% on a unanimous vote. At the midpoint of its new range the Fed pays 3.875% against the ECB's 2.50%, a distance of 1.375 points, the same as this morning. The projections are where the two part company. The American median for the end of 2027 moved from 3.6% to 4.1%, taking next year's cuts off the table, while the ECB has committed to nothing past its next meeting. Two central banks moved the same distance in the same week and only one of them said where it goes afterward.

The chair is not in his own dot plot

Half an hour later the chair explained the bar: confidence that underlying inflation is moving to 2% clearly and at sufficient speed, which he said the summer's numbers have not delivered. He also confirmed he had not submitted a projection of his own, as he did not in June. So the 4.1% median that just put the Euro through 1.1500 is the view of eighteen people, and the nineteenth is the one who read it out.

Levels and bias

Resistance: The 50-day and 200-day Exponential Moving Averages (EMA) sit six pips apart just above 1.1550, and the pair dropped through both today. That band is the first cap, with 1.1600 above it.

Support: Today's low in the 1.1450 area is the floor, and 1.1400 is the next round level beneath it.

Bias: Bearish while the average band just above 1.1550 caps, with 1.1450 the first objective and 1.1400 behind it. On the daily chart the Stochastic Relative Strength Index (Stoch RSI), which gauges momentum, is down near 15, deep in the lower quarter of its range, so the move is stretched and a bounce toward 1.1550 would not change the reading. A daily close back above 1.1600 voids the case.


EUR/USD daily chart

Interest rates FAQs

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

Author

Joshua Gibson

Joshua joins the FXStreet team as an Economics and Finance double major from Vancouver Island University with twelve years' experience as an independent trader focusing on technical analysis.

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