EUR/USD: The FED's communication's are less transparent

Amid sustained volatility, the Euro suddenly surged against the Dollar following the Fed's decision to keep federal interest rates unchanged at the conclusion of Wednesday's FOMC meeting.

Within the Board, "dissenting voices emerged," note DWS strategists. "Beth Hammack, Neel Kashkari, and Lorie Logan voted in favour of a rate hike - a stance they had clearly signaled prior to the meeting. Only one word in the statement was altered: the Fed 'continues' to maintain ample reserves, rather than 'reaffirming' them. Growth was described as 'solid' and inflation as 'elevated.' As Fed Chair Warsh had indicated to us, the disappointing June inflation report by no means signifies 'mission accomplished.'"

All in all, the tone was relatively hawkish, leaving currency traders in a state of uncertainty.

"Overall, the meeting's restrictive tone once again leaves room for ambiguity. A rate hike remains a possibility, the inflation target stays the top priority, and markets are beginning to behave as expected - effectively doing some of the Fed's work for it. However, this stance flirts with the fine line between vigilance and overconfidence. The new Fed Chair could soon be put to the test by the markets. They might withdraw their support by ruling out any rate hikes from their expectations, or conversely, brace for rising inflation by driving yields up significantly."

Inflation will indeed be the number one priority, and currency traders will have a valuable benchmark this afternoon with the PCE price index - the Fed's preferred measure for gauging price increases. A monthly rise of 0.2% is anticipated. Following the Federal Reserve meeting, PIMCO economist Tiffany Wilding offered the following insights:

"Although the market had anticipated a hike, the FOMC's decision to hold rates steady aligned with our expectations, given how clearly Fed officials had reiterated the June message: further hikes were contingent on inflation remaining persistently high."

"However, Warsh's decision to abandon forward guidance risks maintaining high volatility at the short end of the curve and increases the likelihood of significant surprises - in either direction - down the line. Indeed, on Wednesday afternoon, uncertainty regarding the Fed's definition of its 2% target - and how persistently high inflation might (or might not) alter monetary policy strategy under Warsh's leadership - contributed to a sharp steepening of the US Treasury yield curve, alongside a rise in long-term inflation expectations (breakeven inflation). This illustrates how markets can react to less transparent communication from the Fed Chair."

Traders remain alert to the situation in the Middle East, where tensions show no signs of easing.

"The situation remains tense, and overnight, the United States launched a new wave of strikes against Iran," notes Deutsche Bank.

Right now, the EUR/USD is trading at $1.15192.

KEY TECHNICAL FACTORS
We are suspending our short positions on the benchmark currency pair above the $1.1408 level, pending a confluence of new technical signals.

MEDIUM-TERM OUTLOOK
Based on the key technical factors we have highlighted, our medium-term view on the EUR/USD is neutral.

We will maintain this neutral stance as long as the EUR/USD remains between the support level at $1.1325 and the resistance level at $1.1503.