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Euro Breaks Down, Momentum Could Continue

H.S. Borji
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Euro Breaks Down, Momentum Could Continue

In her first press conference as head of the FOMC Janet Yellen made a splash, but once she likely did not foresee. Each word and phrase uttered by the Chairwoman is carefully parsed, and in this instance, she was asked specifically about the timing of potential interest rate hikes once the Fed is complete with the unwinding of its bond purchase program.

The FOMC, in its statement said that there would be a considerable period between the completion of the asset purchases and the first increase in rates. This terminology is ambiguous and in line with past timeframes that the fed relayed to market participants. However, when pressed, Yellen opined that a a considerable period could be around six months.

Investors quickly adjusted their expectations. The market anticipates the FOMC completing the asset purchases in October. Yellen’s clarification points to a hike as early as Q2 15. It would not be surprising if in subsequent commentary, the Fed’s leadership tries to backtrack from those implications as many expect the first hike to be in late Q3 or Q4 2015. Fed funds at the end of next year are now seen at 1.0%, up from 0.75% in December 2013, when the last projections were made. Just as importantly, at the end of 2016, Fed funds are seen 2.25%, up from 1.75%.

The Euro quickly moved to trend line support near 1.38750, and then continued on Thursday pushing through support level and poised to move lower toward target support near 1.3650. Momentum is negative as the MACD (moving average convergence divergence) index generated a sell signal. This occurs as the spread (the 12-day moving average minus the 26-day moving average) crossed below the 9-day moving average of the spread. The index moved from positive to negative territory confirming the sell signal.

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