EUR/USD Falls Post-Fed, ECB Policy Meetings

The US central bank doubles its QE reduction to USD 30 billion, eyeing three rate hikes in 2022. The ECB announced a “hawkish” hold, PEPP to end in March as scheduled.

On Friday, the EUR/USD plunges during the New York session, trading at 1.1237, down by 0.85%. The market sentiment is downbeat, spurred by monetary policy decisions by three of the most important central banks, as investors assess those decisions and rebalance their portfolios.

Fed increases taper speed eyeing three hikes, and the ECB follow its footsteps at a slower rate on Wednesday, the Federal Reserve announced its monetary policy decision. The US central bank kept their interest rates unchanged at the 0 to 0.25% range while increasing the speed of the bond taper, from the USD 15 billion agreed initially up to USD 30 Billion, beginning in mid-January of 2022.

Fed also released its Summary of Economic Projections, also known as SEP including the famous “dot-plot”, which displays the 18 Federal Reserve Board members’ projections for the Federal Fund Rates (FFR) in the current year, and subsequent ones.

In this report, the US central bank policymakers expect three rate hikes by the end of 2022, projecting the FFR at 0.90%. The market initially reacted as if the event was a “buy the rumor sell the fact.” Nevertheless, Friday’s price action is more aligned to the hawkish switch by the Fed.

Concerning the European Central Bank, the central bank kept rates unchanged and announced that the Pandemic Emergency Purchase Programme (PEPP) wound end in March as expected. Nevertheless, the ECB will boost the APP program to a pace of Euro 40 Billion per month in Q2, from Euro 20 Billion currently, meaning that the actual taper would be in the amount of Euro 40 Billion, as the PEPP purchases accounted for Euro 60 Billion. Regarding adjusting interest rates, ECB’s President Christine Lagarde said that it was “very unlikely” that the ECB will hike rates in 2022.

The European economic docket reported the PPI for Germany and the December IFO business survey. The PPI rose by 19.2% on an annual basis, lower than the 20% estimated, suggesting further upside pressures on CPI on the subsequent releases. In the meantime, the IFO came at 94.7 lower than the 95.3 foreseen.

After peaking around 1.1350, the EUR/USD tumbled towards 1.1238, approaching the December 15 swing low at 1.1221. The EUR/USD is neutral from a market structure perspective, as it has failed to break below/above the 1.1200/1.1385 in the last couple of weeks. Nevertheless, as long as the daily moving averages (DMAs) remain above the spot price, the EUR/USD has a bearish bias.