In the immediate aftermath of the announcement by the US Federal Reserve that it was not raising interest rates at the end of last week’s FOMC meeting, on the 17th, there was something of a knee-jerk reaction in Forex markets, and the EURUSD pair was bid up – the dollar weakened.
The following day, however, there was a definite change of mind on the part of market participants. It would appear that mature reflection caused the big players to decide that even if US rates were kept on hold on this occasion, the factors that will give rise to a tightening in the US are not only still in place, but are becoming more pronounced. In other words, it is only a matter of time before the Fed will bite the bullet.
This was enough to bring the rate for the Single Currency down to below the 200 Day Exponential Moving Average (EMA) once more. This level also coincides with the nice round figure of 1.13, and there is a real feel to this being a difficult resistance level to overcome for the pair.
Talk of increased ECB QE
At the same time, on the last day of trading last week, there was increased chatter on the newswires about the prospects for an acceleration of the Quantitative Easing (QE) that the European Central Bank (ECB) has embarked on. This is in response to the continued deterioration in the inflation outlook for the Eurozone. There is now every indication that consumer price growth in the EZ will dip into negative territory before it starts to rise again. This qualifies as deflation, which is a state of affairs that the central bank is greatly concerned about. Increased QE in the Eurozone would dovetail nicely with the expected hardening of US monetary policy to drive the EURUSD pair down, perhaps even to approach the much vaunted parity with the dollar.