EUR/USD: Two-year low after the Fed

The Fed’s hawkish tone sends EUR/USD tumbling

EUR/USD fell to a two-year low below $1.04 late Wednesday following hawkish rhetoric from the Fed. The American Federal Reserve unsurprisingly lowered its rates by 25 basis points, but surprised by significantly revising downwards its rate cut expectations for next year.

The American central bank now only expects a rate cut of 50 basis points next year, compared to 100 basis points three months ago. Markets were expecting some downward revision in rate cut expectations due to recent inflation data, but not as much.

The dollar and bond yields therefore jumped while risky assets fell. The 2 and 10-year Treasury rates rose by 11 basis points yesterday, with the 10-year rate returning to its highest level since the beginning of June at 4.52%.

The markets now have their eyes fixed on the publication of November PCE inflation for the United States on Friday, which should come out relatively soft. The PCE index, the Fed’s preferred inflation measure, is expected to rise 0.15% (up from 0.24% in October), while the core PCE index is expected to rise 0.13%. (compared to 0.27% in October). A reading below expectations would relieve the markets and allow the EUR/USD to regain some height and vice versa.

EUR/USD Weekly Price Chart – Key Levels