Forex Market: EUR/USD touches two-week lows as Fed signals rate hike by mid-2015

The euro declined to the weakest level in two weeks against the US dollar, extending yesterdays losses after Federal Reserve officials signaled a rise in interest rates may be expected by mid-2015, while further trimming monetary stimulus.

EUR/USD touched a session low at 1.3757 at 11:18 GMT, after which consolidation followed at 1.3769, losing 0.46% for the day, extending yesterdays 0.8% slide. Support was likely to be found at March 6th low, 1.3722, while resistance was to be encountered at March 19th high, 1.3933.

The Federal Reserve revised its forecasts yesterday, showing more policy makers predicted the main interest rate, now close to zero, would increase at least to 1% by the end of next year and 2.25% by the end of 2016, higher than previously forecast.

The stance of the central bank was seen as slightly more hawkish than investors expected, boosting demand for the US dollar.

Policy makers remained on track with Fed’s previous decisions to reduce the central bank’s unprecedented Quantitative Easing program at each successive FOMC meeting and trimmed the bond-buying program by another $10 billion to $55 billion per month. The monetary easing program is expected to be brought to an end this fall.

Moreover, Federal Reserve Chair Janet Yellen, who presided her first FOMC meeting, said at a following conference that the first increase in borrowing costs should come “around six months or that type of thing” after the end of the stimulus program. Policy makers also scrapped the unemployment-rate threshold for considering when to raise interest rates and said it will look for a wider range of data.

“We’re looking for the dollar to remain supported,” said Ian Stannard, head of European currency strategy at Morgan Stanley in London, cited by Bloomberg. “We’d focus that very much against the commodity-related currencies. In initial moves the euro could also have a bit of a setback.”

Meanwhile, in the 18-nation common currency bloc, the labor cost index was reported yesterday to have increased 1.4% during the final quarter of 2013, compared to the same period a year ago.

In addition, output in region’s construction sector expanded 8.8% in January 2014 compared to January 2013. In monthly terms, output rose 1.5% during the first month of the year.

Elsewhere, EUR/GBP touched a session low at 0.8340 at 09:27 GMT, after which consolidation followed at 0.8346, losing 0.22% for the day. Support was likely to be received at March 17th low, 0.8342, while resistance was to be met at March 19th high, 0.8395. On March 18, the pair hit 0.8400, the strongest since December 18.