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EUR/JPY pressured by toxic FOMC cocktail, damaged stocks and risk appetite

  • FOMC: a toxic cocktail for risk appetite and the cross.
  • EUR/JPY is currently trading at 128.00 having fallen to 127.55 from a high overnight of 128.39.

EUR/JPY is stabilising following a post-Fed drop that shook US stocks to their core with downgrades near-term growth outlooks while maintaining the rate hike mantra, a warning to companies that tighter money conditions are here to stay with the possibility of a slower pace of economic growth. 

FOMC outcome

As expected, the Federal Reserve hiked rates following unanimous at the FOMC. Rates were raised by 25 basis points to 2.25% - 2.50%. The Statement came with little new, repeating that risks to the economy appear 'roughly balanced' and will "continue to monitor economic and financial conditions for their effects on the economic outlook." However, the Fed forecast two hikes in 2019, above where the street has priced which fulled a rally in the greenback. There was also a boost to growth forecasts for 2020 but downgrades to 2018 and 2019 while inflation forecasts were unchanged - (DXY rallied from 96.61 to a high of 96.96) - That is a toxic cocktail for risk appetite and the cross.

  • Federal Reserve's FOMC statement - Dec. 19 - full text
  • FOMC raises the target for fed funds rate by 25bp to 2.25% - 2.5%

GDP forecasts:

  • 2018 3.0% vs 3.1%
  • 2019 2.3% vs 2.5% prior
  • 2020 2.0% vs 1.8% prior

Inflation:

  • 2018 1.9% vs 2.0% prior
  • 2019 2.0 vs 2.1% prior
  • 2020 2.0% vs 2.1% prior

EUR/JPY level

Analysts at Commerzbank explained that the EUR/JPY pair remains under pressure:

"It has eroded the 4 month support line and sold off to the December low at 127.63. This guards the October trough at 126.64. While above 127.63 longer term scope remains on the topside (this is less favoured). While above 127.63, the initial target is the 200 day ma at 129.66, but to reassert upside pressure the market will need to overcome the 130.15 7 th November high. This will target 131.98 17th July high, then the 133.12/13 highs from September."

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