The EUR/USD was unable to continue its run higher, losing 98 pips to finish at $1.3295. The sharp declines occurred directly after the release of the latest FOMC minutes, which the many analysts deemed as more hawkish than expected.
Greg Gibbs, FX Trading Strategist at RBS provided some thoughts on the release, detailing a few of the comments which may have helped create the firm bid in the USD. "It appears that Bernanke has taken the view that the market needed a bit more guidance over the type of taper the Fed has in mind. He indicated in the press conference that if all goes to plan (famous last words) the taper would be done by mid-2014."
In conclusion, Gibbs went on to comment the statement was viewed as hawkish, most notably with the Fed lowering its unemployment outlook from 2013 through 2016. Although the Fed did also lower its inflation forecast, the statement did not seem overly concerned about the recent lull in inflation readings, with the exception of Fed member James Bullard's dovish dissent.
Analysts at Rabobank also agreed the Fed's tone seemed more upbeat then previously about the economic recovery. "He (Bernanke) sent a more hawkish signal than we and most in the market had anticipated and there was quite a sharp market reaction." In going on to discuss the market price action, Rabobank added, "U.S. Treasuries sold off on prospects for less generous liquidity from the central bank over time and on increased risks of an actual tightening in monetary policy in the next few years. The yield on 10Y U.S. Treasuries rose to 2.36% from circa 2.18." In conclusion, Rabobank noted the sharp move higher in yields seemed to help provide a firm bid to the DXY index which finished up 1.2%.
Although the FOMC meeting was the major headline of the day, Kathy Lien of BK Asset Management went on to point out a few developments in Europe which will be important to focus on in the coming days.
Eurozone PMI numbers are scheduled for release tomorrow [Thursday] and these are the most important pieces of economic data expected from the region this week. If the data surprises to the upside, speculation about negative interest rates will recede and the euro could recover some of its losses.
Lien went on to conclude if the ECB does dial down its dovish tone, the EUR is likely to see better performances against commodity currencies such as the AUD and NZD, instead of the USD.
It is important to point out that the sharply lower close did create some minor technical damage on the EUR/USD daily chart. Firstly, the candle which was formed on the daily chart can be labeled a bearish engulfing candle. Since the candle formed after a few weeks worth of sharp gains, the development is more important. Secondly, price closed below the 9 DMA ($1.3325) for the first time since May 28th. This is a short-term moving average that has acted as support/resistance in the past so will be important to monitor going forward. On a final note, the ADX (7) is now sloping slightly lower, a sign trend strength on the daily chart is deteriorating and a period of consolidation or a short-term correction may be possible in the coming days. Initial resistance now sits at $1.3325 (noted above), while first support sits at $1.3240 (support on the daily chart).