Hawkish Federal Reserve sends EUR/USD to $1,19 and Gold towards $1,800/oz

Vrasidas Neofytou
Head of Investment Research

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Hawkish Federal Reserve sends EUR/USD to $1,19 and Gold towards $1,800/oz

The EUR/USD pair extended recent losses, breaking below the key psychological level of $1,20 on Thursday morning, while Gold fell to as low as $1,800/oz as the surprised hawkish stance by Federal Reserve triggered a rally on US dollar and Treasury yields.

US dollar and Treasury yields advance amid Federal Reserve’s hawkish stance:

US dollar, the world’s reserve currency shines again, following the Federal Reserve's latest monetary policy decision and updated forecasts for economic growth and inflation in the United States.

The DXY-US dollar’s index against six major currencies rallied above 91.75 level, for the first time since April, while the US 10-year Treasury yield rose to 1.57% level, well above the 4-month low of 1,43% reached a few days ago.

The US central bank kept its benchmark interest rate on hold (near to zero) and bond purchase programme intact, while it pointed to two rate hikes in 2023. Investors were surprised from the Fed’s rate dots where the median expectation is now for 2 hikes in 2023 with only 2 dots away from 2022 also showing a hike."

Hence, FED expects US GDP to grow by 7.0% in 2021 vs 6.5% previously predicted, whereas the Personal Consumption Expenditure price index (PCE), the Fed’s preferred inflation gauge, is seen at 3.4% for 2021 and 2.1% for 2022.

Fed’s chair Jerome Powell said during last night’s press conference that the US economy ultimately remained "a ways off" from reaching "substantial further progress" toward the Fed's goal of maximum employment that would signal a start to tapering.

However, investors expect the FED to start gradually tapering its massive pandemic-relief monetary stimulus and hiking interest rates sooner than previously anticipated since the employment data has been trending in the right direction while the US inflation rising faster-than-expected.  

Market Reaction:

The greenback has been outperforming across the forex board, with the rate of EUR/USD pair falling to as low as $1,1940 on Thursday morning, posting its lowest level since mid-April. Euro has lost almost 400 pips since topping at $1,2350 on January 2021, despite improved economic outlook in Eurozone after pandemic.

EUR/USD pair, 4-hour chart

The USD/JPY passed 110 key resistance level, while GBP/USD broke below the $1,40 mark for the first time since early May.

The commodities-linked currencies Canadian, Australian, and New Zealand dollars retreated from yearly highs against the dollar as well despite improved economic data and higher crude oil prices.

Precious Metals tumbled on soaring dollar and yields:

Gold prices tumbled yesterday following Fed’s policy meeting, falling to as low as $1,800/oz (1-month low) while the silver price broke below $28/oz key support level on stronger US dollar and firmer Treasury yields.

The higher interest rates and firmer greenback have been negative events for precious metals since they increase the opportunity cost of holding the non-yielding and dollar-denominated gold and silver metals.

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