FOMC aftermath: Euro can surge to 1.16, reduction in dollar longs – SocGen

FXStreet (Delhi) – Kit Juckes, Research Analyst at Societe Generale, suggests that the Fed’s decision to leave rates on hold was not a surprise to a market positioned that way but the tone was not dollar supportive but the yield differentials are moving in the Euro’s favour and may take us back to 1.16.

Key Quotes

“The tone of the statement and the new lowered ‘dot-path’ (median sees one hike this year, 4 in 2016, 5 in 2017 and 3 in 2018 for a 3.375% Funds rate peak) have dragged Treasury yields lower. That is not dollar-supportive. However, the tone of the message is unlikely to trigger broad-based asset inflation or boost risk sentiment sustainably. We’ll see a further reduction in dollar longs across the board, but I expect those moves to be pretty short-lived.”

“Meanwhile, risk sentiment and volatility now correlate positive with Euro strength so this is a currency pair in a state of flux. However, Euro and a dovish Fed add to pressure for further ECB easing. Could we see a further cut in rates if EUR/USD gets much higher? That said, if the EUR/USD outlook depends more on the ECB than the Fed, the potential downside to EUR/USD is decreasing. The ECB just doesn’t have that much room to drive rates down.”