EURUSD hits 6-month lowAs Fed hints at one more hikeEUR to stay pressured through October says INGLess rate cuts are now seen in 2024But EURUSD weakness about to max out say some analysts

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The Dollar ascended against the Euro after the Federal Reserve kept interest rates unchanged but maintained it stands ready to hike again before year-end, while also pushing back against rate cut expectations.

The decision to hold was always expected, leaving it to the guidance to prompt a currency market reaction. And it was a reaction that FX punters got with some decent moves seen in the Dollar exchange rates.

Volatility followed the release of the Fed's projections for future moves in interest rates, which showed the majority of members of the FOMC continue to expect a rate hike before year-end, while the number of cuts expected in 2024 were slashed.

This had the effect of bolstering U.S. bond yields and the Dollar.

"USD is mostly building on the gains that came in the immediate wake of the FOMC statement and more hawkish than expected dot plot, EUR/USD making a new six-month low," says Adam Cole, Chief Currency Strategist at RBC Capital Markets.

The Euro to Dollar exchange rate traded as high as 1.0736 on Wednesday before falling in the wake of the Fed decision to close out at 1.0660, extending to 1.0616 on Thursday morning.

"Our original expectation was for the Fed to hold the terminal FFTR level at the range of 5.25-5.50% for the rest of 2023. But the Dotplot’s hawkish upward revision together with SEP’s “soft landing” projections is making us reassess," says Alvin Liew, Senior Economist at UOB, who now expects a final hike from the Fed in November.

"EUR/USD erased the gains for the day upon the FOMC announcement declining almost a full figure on the hawkish hold from the Fed," says Stefan Mellin, Chief FX Analyst at Danske Bank.

The updated projections from the Fed showed board members retain a forecast of one more 25bp hike before year‑end, while they trimmed the 2024 rate cut scenario from 100 basis points of cuts seen in June to 50bp of cuts.

The Fed Funds futures market has now pushed back its pricing for the first 25bp cut to September 2024.

According to Chris Turner, Global Head of Markets and Regional Head of Research for UK & CEE at ING, "this hawkish hold may well keep the dollar bid into October".

Above: Comparison & History Of Past Projections, image courtesy of UOB.

He says it will have to be softer U.S. activity data – particularly a rise in jobless claims or a decline in consumer confidence and retail sales – which will be required to soften up the dollar.

"Dollar bears will get no joy from the Fed," he adds.

But analysts at Danske Bank see Euro-Dollar weakness potentially easing as peak pessimism towards the Eurozone's manufacturing sector and China improve from pessimistic bases

"Despite the ongoing USD strength, we anticipate there could be some potential for some EUR/USD tailwinds in the near term. We think that peak policy rates, improving manufacturing sector relative to the service sector and/or easing pessimism priced on China could add some support to EUR/USD within the next month," says Mellin.

Above: EURUSD showing volatility through the course of 'Fed day'

Vasileios Gkionakis, a foreign exchange strategist at Macro Hive, says the bigger growth picture will be of more importance for the Dollar going forward, given Fed rate hike expectations are close to maxing out.

He says with rate expectations likely to remain stable, it falls to equity markets and China to drive Dollar direction.

"On valuation, equities do not look expensive relative to bonds," he notes, citing Macro Hive's studies on equity valuations.

"In a nutshell, current relative valuations scream neither over- nor under-valuation. Absent another geopolitical or exogenous shock, global growth is unlikely to plummet or accelerate meaningfully over the next few months," he explains.

And China is unlikely to under- or over-shoot GDP growth expectations meaningfully, he adds.

This leaves the Dollar struggling for direction "in the next few months," says Gkionakis.