- EUR/USD bears stay in control as Asian shares take a plunge.
- The Fed's hawkishness is reverberating throughout global markets, weighing on risk-sensitive currencies.
The US dollar is bid in Asia and risk aversion remains in play while investors fret over the Federal Reserve's plans to steadily tighten policy and political tensions between Russia and Ukraine. The euro, which trades as a proxy to these themes is continuing to bleed out from Wednesday's slide in EUR/USD.
As expected, Fed officials left the funds rate unchanged, kept QE on track to end in March, and signalled a likely rate hike in March. However, chairman Jerome Powell's tone was more hawkish than expected which sent US yields and the dollar on a tear, weighing heavily in the euro due to the divergence between the two nations' central banks.
EUR/USD enters the 1.10/12 trading range
At the time of writing, EUR/USD is losing some 0.15% to 1.222 the low and has fallen from a high of 1.1243. The move is in tandem with the slide in Asian shares that have fallen to their lowest in more than 14 months with MSCI's broad gauge of regional markets outside Japan down at its lowest level since early November 2020. Hong Kong's Hang Seng index and Australian shares fell 2% and Chinese blue-chips were 0.2% lower. In Tokyo, the Nikkei fell 3.22%, touching its lowest point since November 2020.
''We now expect four instead of three 25bp rate hikes along with the start of QT this year,'' analysts at TD Securities said with respect to the Fed. ''We also now expect QT to formally be announced in May, instead of September, so we have a tightening announcement at each of the next three meetings. For 2022, we forecast a 25bp hike in March, the start of QT in May, and then 25bp hikes in June, September, and December.''
''Powell did not pull any punches on the potential need to tighten aggressively. This supports our bias for further USD resilience early this year, particularly against the funders. EURUSD is likely to enter a new lower 1.10/12 trading range.''