Dollar doesn’t profit from ‘hawkish’ Fed rate hike

The dollar traded with a cautious negative bias yesterday going into the Fed decision, with EUR/USD nearing 1.18. USD/JPY eased to the mid 110 area. The Fed as expected raised the Fed fund target range by 0.25%. The dots suggest two additional rate hikes this year and Fed’s Powell remained positive on the economy. On the other hand, Powell reiterated that the inflation target is symmetric and that policy shouldn’t react to short-term deviations from target. Yields and the dollar spiked temporary higher upon the Fed decision, but the gains couldn’t be sustained. EUR/USD closed the session at 1.1791 (from 1.1745). USD/JPY finished the session little changed at 110.34 after a temporary post-Fed trip towards the 110.85 area.

Asian stocks mostly show moderate losses overnight. Disappointing Chinese data and a moderately hawkish Fed yesterday are weighing on regional markets. The dollar also fails to capitalize on yesterday’s hawkish Fed message. EUR/USD returned to the 1.18 area. USD/JPY eases back to the low 110 area. The Aussie dollar continues trading soft (AUD/USD 0.7560 area) after mediocre Australian labour market data.

US retail sales and import prices will be published today. Retail sales are expected solid (0.4% M/M) and import prices will probably maintain an upward trajectory. However, a big surprise is probably needed to trigger a USD reaction with the Fed rate hike path more or less cemented. The dollar might be more sensitive to weaker rather than to strong data. Still, the focus will be on the ECB. We expect the ECB to prepare markets to stop APP end of this year. This might cause a further repositioning in favour of the euro. Over the previous days, we held the working hypothesis that the downside of EUR/USD had become better protected even with a more hawkish Fed. We maintain that view. A return of EUR/USD below 1.1510 has probably become difficult. First resistance in EUR/USD stands at 1.1830/40. A break would open the way to the 1.20 area.

Sterling traded with a slightly negative bias (against the euro) yesterday as UK CPI remained soft an as Brexit noise persisted. May retail sales are expected to rise modestly (0.3% M/M core). We maintain the view that a substantial positive surprise is needed to support a sustained rebound of sterling. Brexit uncertainty persists. We expect EUR/GBP to hold in the upper part of the 0.8700/0.8850 consolidation pattern.

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