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EUR/USD posts modest gains, after Fed leaves interest rates unchanged

ForexJan 27, 2016 06:20PM ET
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EUR/USD gained more than 0.20% on Wednesday to close at 1.0893. -- EUR/USD posted modest gains on Wednesday in a volatile day of trading after the Federal Reserve left short-term interest rates unchanged, one month after abandoning a seven-year zero interest rate policy with a historic rate hike.

The currency pair traded in a broad range between 1.079 and 1.0917, before settling at 1.0893, up 0.0031 or 0.29% on the session. The euro spiked to session-highs versus the dollar following the release, before falling back slightly at the close. With the gains, the euro finished with its third consecutive winning session against its American counterpart and closed at its highest level in more than a week. As the first month of the year draws near its completion, the euro is on pace to end January up slightly against the dollar – by approximately 0.40%.

EUR/USD likely gained support at 1.0538, the low from December 3 and was met with resistance at 1.1496, the high from Oct. 15.

Citing projections for weak economic growth and sluggish inflation expectations, the Fed as expected held its benchmark Federal Funds Rate at a level between 0.25 and 0.50%. While acknowledging that conditions in U.S. labor markets, along with household spending and business fixed income had improved in recent weeks, the FOMC blamed the recent slowdown in part on soft net export prices and the decline of inventory investment. As manufacturing production, retail spending and energy prices slumped dramatically in the fourth quarter, GDP growth for the period is expected to fall around 1%, substantially below previous estimates.

In one notable change, the FOMC removed a phrase that it is "reasonably confident" inflation will move toward its 2% objective from the statement. The minutes from the December FOMC meeting showed that the Fed does not expect long-term inflation to reach the target until 2018. The Core PCE Index, the Fed's preferred gauge on inflation, lingered around 1.3% in its latest reading last month.

"In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal," the FOMC said in the statement. "The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate."

Analysts appeared divided on whether the statement indicates that the Fed could be leaning toward a subsequent rate hike in March or if the U.S. central bank could delay further tightening measures beyond the first quarter. The decision, according to the Fed's statement, will hinge on evolving labor market conditions, inflation expectations and developments in the global financial markets. Following the release, the CME Group's (O:CME) Fed Watch tool lowered the implied probability of a March rate hike to 27.7% from 30.3% earlier on Wednesday.

The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, settled at 99.03, down 0.05% on the day. The index remains near 12-month highs from December, when it eclipsed 100.00.

Investors await the release of January industrial and consumer data in the euro zone on Thursday for further signals of potential divergence between the Fed and the European Central Bank. Last week, ECB president Mario Draghi sent strong signals that the bank could approve a fresh round of stimulus measures when it meets again in March.

Yields on the U.S. 10-Year closed on Wednesday virtually flat at 2.003%. Minutes before the Fed's release, bond yields on U.S. 10-year Treasuries were at 2.043%, up four basis points on the session.

EUR/USD posts modest gains, after Fed leaves interest rates unchanged

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