Daily Market Recap – EURUSD Dollar climbs after Fed's inflation projections

The dollar climbed Wednesday against the euro after the U.S. Central Bank (Fed) revised upward its inflation forecast for 2021 and announced its intention to raise rates twice in 2023.

At market close on Wednesday, the euro lost over 1 % against the greenback, crossing the 1.20 psychological threshold, trading at 1.19959 dollars for one euro.

The dollar index, which measures the value of the greenback against a basket of other currencies, was up 0.98%.

The market's anticipation of a rise in U.S. policy rates tends to favor the greenback, which becomes more remunerative when the cost of money increases.

That said the Fed did not touch its rates, currently in a range between 0% and 0.25%, but said it was considering raising them twice in 2023 to accommodate the return of growth in the United States, which was enough to tank the euro.

The institution expected prices to rise by 3.4% this year, compared to 2.4% in its March estimate.

The Fed nevertheless considers this inflation to be transitory and sees it stabilizing at 2.1% in 2022 and 2.2% in 2023.

The dollar is still down 1.7% against the euro since the beginning of the year.

Meanwhile, gold prices also took a nosedive after the announcement, falling by over 2.5% on the day as investors dumped the non-interest-yielding asset in favor of the buck.

“We remain convinced that the dollar's downward trend will continue and believe that today's rebound is only a temporary boost,” note Wells Fargo analysts.

“Much will depend on the message of the Fed leaders in the coming weeks regarding their view on inflation and the choice of the members of the monetary policy committee to continue or not to undermine the importance of the 'dot plot' (the average of the Fed projections, editor's note),” they add.

From a technical perspective, the euro bulls will likely attempt a push to return over the 1.20 mark to mount a proper defense at this critical level. Holding above this point should see the EURUSD trade between the 1.20 and 1.21 range once again. Only a cross above the 20-day moving average around 1.216 will provide the necessary boost to enable a test of the 2-month high of 1.226 in the coming sessions.

(Chart Source: Tradingview 17.06.2021)

Failure to contain the correction above 1.20 will open the door for a further drop towards the next significant support zone between the 1.19 and 1.186 levels.

Disclaimer: This material has been created for information purposes only. All views expressed in this document are my own and do not necessarily represent the opinions of any entity.