The Fed dot plot revealed two possible rate hikes in 2023, and that was all the US dollar bulls needed to send the Dollar index to two-month highs.

The Federal Reserve of the United States (Fed) took markets by surprise yesterday as the FOMC statement revealed that the Fed expects two rate hikes in 2023 – not only one, as was the consensus. Moreover, the Fed hiked the interest on excess reserves, a first sign that the removal of the accommodative measures has begun.

The markets tanked instantly at the moment the FOMC statement was released. The EUR/USD, AUD/USD, GBP/USD – they all dropped close to one large figure (i.e. one hundred pips) before the press conference even started.

At the press conference, Fed Powell delivered a hawkish statement as well. While trying to downplay the move, he expressed the Fed’s concern with inflation and that the tapering is on the table in the upcoming months.

The stock market did not like the Fed’s message, but the correction was not as severe as many would have thought. The Dow Jones index dropped below 34,000 points, and the Nasdaq 100 below 14,000, but nothing dramatic so far. In Europe, the German DAX index holds close to its all-time highs.

Commodities were hit by the US dollar’s move higher. In particular, precious metals fell aggressively – gold and silver both down about 3%. Oil remains bid while above $70.

Daily Analysis

The economic calendar today features another central bank, this time the Swiss National Bank (SNB). While a second-tier event, the SNB decisions are important for Swiss franc traders because the SNB meets only once a quarter. Hence for those willing to check how the Swiss economy has performed since the last quarter, this is the time to do it.

The rest of the trading day will likely focus on the market participants digesting the Fed’s message. As such, the Final CPI in the Euro area or the Philly Fed Manufacturing index in the United States are secondary in importance.

Markets to Watch

Nasdaq 100, EUR/USD, EUR/JPY – markets in focus today.

Nasdaq 100

Nasdaq 100 is at major support as it is now testing dynamic support. The Fed’s decision weighs on the stock market and the next critical level is 13,700. A daily close below this pivotal area should trigger more weakness.

EUR/USD

The EUR/USD pair appears to have formed a massive double top pattern visible on the weekly timeframe. If that is correct, the pair has more downside potential to the 1.14 area and beyond.

EUR/JPY

A head and shoulders pattern is visible on the EUR/JPY cross. Judging by the velocity of it and the weakness in the other euro pairs, 130 might be just around the corner.

Winners and Losers

The US dollar is the net winner on the FX dashboard, while the euro is sold across the board.