EUR/USD Forecast: after hawkish Fed rate hike focus turns to ECB

The US Dollar spiked after the FOMC, as was widely expected, raised the Fed funds rate by +25 bps to a range of 1.75-2.00%, marking the seventh hike since December 2015. The so-called “dot-plot” showed two additional rate increases in 2018 as the policymakers interpreted the incoming US macro data as supportive of a more aggressive monetary policy tightening cycle. The euphoric reaction, however, failed to stick, with the EUR/USD pair quickly rebounding from the post-Fed swing low level of 1.1726 to finally end near daily tops. 

The pair moved back to the top end of a one-week-old broader trading range as investors turn their focus to the latest monetary policy update by the European Central Bank. Market participants speculate that the ECB could provide clues about its intentions to end the massive quantitative easing program this year. Should the central bank fail to do so, widening ECB-Fed rate differential might affect negatively on the shared currency and trigger a fresh leg of downside for the major.

From a technical perspective, the pair positioned in neutral territory and could breakout in either direction, depending on the ECB outlook. A sustained move beyond June highs, the 1.1835-40 region, would be seen as a bullish signal and pave the way for an extension of the pair's recent recovery move from over 10-month lows. The up-move has the potential to continue boosting the pair towards reclaiming the 1.1900 handle en-route its next major hurdle near the 1.1940 area. 

Alternatively, any meaningful retracement back below 1.1765 level might continue to find support near the 1.1730-25 region. A convincing break might prompt some aggressive selling and turn the pair vulnerable to break below the 1.1700 handle and accelerate the fall towards testing the 1.1660-55 support area.

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