Following yesterday’s FOMC, let’s take a look at the highest-volume USD pair, EUR/USD. With Warsh trying to make it seem like inflation is the Fed’s main target again despite not hiking, the Euro saw only a relatively small bounce.
EUR/USD on the Daily Timeframe
This reaction is a logical one. While a rate hike was definitely a possibility, it still wasn’t the base case. The Fed thus holding rates and erasing the odds of a rate hike meant a slightly weaker Dollar, just not overly weak, as a hike had only a 30% chance of happening before the FOMC.
This is not necessarily the start of a breakout for the Euro; if anything, we would need to see the pair reclaim 1.15 and hold it as support. That combined with large speculators who are overextended short as visible in the Commitment of Traders report, could possibly create a violent short squeeze. This whole framing, however, depends on the Euro being able to find additional strength here and allow the technicals to line up with the fundamentals.
Otherwise, this seems like a case where the shorts of the large speculators will pay off as 1.13 becomes the medium-term downside target.