The US dollar is the main driver of the currency markets after the Federal Reserve (Fed) delivered a surprisingly hawkish accompanying statement on Wednesday.

Cable retreated to 1.3448 (minor 23.6% retrace on August – September rise) following the Fed decision and rebounded shortly after. The better-than-expected August retail sales data released earlier on Wednesday, kept the Bank of England (BoE) hawks in charge of the market and the GBP-bulls ready to buy the dips. The pound is among the best performers against the surging US dollar in London. The failure to clear the minor Fibonacci support suggests a recovery and consolidation toward the 1.3525 (100-hour moving average).

The FTSE stocks opened slightly upbeat, yet buyers could feel uncomfortable with carrying the index above the 7300p due to the sharp appreciation in the pound.

The EURUSD plunged to 1.1860 on solid USD demand posterior to the Fed announcement on Wednesday.

In Spain, tensions are rising due to the Catalan independence referendum scheduled on October 1, however it may be too early for the uncertainties being reflected in the euro's valuation.

The pair could rebound back to its 200-hour moving average (1.1953) as the hawkish Fed surprise is absorbed by the market and the focus shifts to the German election. Many traders may prefer to turn flat to avoid the two-sided event risk. While a relief rally could be on the menu on Monday, the fact that it could take up to 100 days to form a government could quickly discourage the euro buyers.

Against the pound, the single currency could continue losing field. The EURGBP failed to clear 0.89-resistance and is back on its way to challenge the 200-day moving average (0.8740).

US dollar, stocks rallied post-Fed

The US dollar rallied aggressively on the back of a hawkish Federal Reserve (Fed) policy verdict. As expected, the Fed maintained the interest rates unchanged at the September meeting, kept the possibility of an additional 25-basis-points hike in December meeting and announced that the balance sheet normalisation will start next month, with $10 billion dollar decline on monthly basis. The FOMC Chair Janet Yellen said that the causes of low inflation are not well understood and should be temporary, however the solid labour market and the encouraging economic recovery are supportive of another rate hike in 2017 and three more hikes in the course of 2018. The probability of a December rate hike surged to 63.8% compared to 53.2% prior to the meeting.

The US 10-year yields spiked to 2.28%. The dip in the US stocks remained short-lived. The S&P500 shortly fell to 2.496.67 and rebounded quickly to close the session at 2'508.24. The S&P's financial sector hit the highest level since 2007. The VIX index slid below the August lows, which points at a complete lack of anxiety from the investors. Markets are not hedging against a sell-off risk in the S&P500 stocks.

The Dow Jones (+0.19%) renewed record at 22'413.26 as investors focused on the Fed's optimistic economic outlook, rather than the imminent Quantitative Tightening.

Gold slipped below $1'300 on improved US rates. The first support formed at $1'295. The negative breakout suggests a bearish reversal on the two-month positive trend and could encourage a further slide toward $1'288 (50-day moving average) and $1'282 (50% retracement on July – September rise).

Fed/BoJ divergence favours a stronger US dollar versus the yen

The Bank of Japan (BoJ) maintained the status quo as widely expected. One of the two new board members voted against the yield-curve control policy, citing that the ongoing policy easing may not be enough to push the inflation toward the BoJ's 2% target. This was an unexpected dovish surprise. The divergence between the Fed and the BoJ policy outlook is supportive of a further rise in USDJPY.

The USDJPY rallied to 112.72; Nikkei and Topix benefited from a softer Japanese yen, yet failed to hold on to their gains into the closing bell. The 115.00 mark could be a plausible mid-term target in the aftermath of the Fed decision. The daily Ichimoku cloud top (111.55) should provide support to the positive breakout.

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