Initial take on Fed was that they delivered a dovish hike - Markets understood their dilemma in abruptly swinging in either direction which could ultimately result in loss of confidence especially after the transitory fiasco.
Powell noted that banking system is sound -the credit crunch is coming. More than any other observation, this caught the eye - "financial conditions seem to have tightened and probably by more than the traditional indexes say. Because the traditional indexes are focused a lot on rates and equities. And they don't necessarily capture lending conditions" - (small banks with a low share of FDIC-covered deposits will reduce new lending by 40%)
Yellen however put a wrench as she said that regulators are not considering a broad increase in deposit insurance- sounds like we are nowhere near having a debate on raising the FDIC limit above $250,000.
So, it all boils down to the question of whether the fallout from crisis will linger longer in US or in Europe. Disturbance in US financial sector appears to be more widespread, deep-rooted, and pre-dates volatility seen in past few weeks.
For now, position cleansing, a standard market response to a crisis will continue to dominate sentiment - have to keep glued to what's happening instead of engaging in these rapid moves. Broadly the entire summer is set to be dominated by ranges rather than any trended move.
EUR/USD prints six-day winning streak, stays firmer DE-US yield spreads & ECB rhetoric. EUR/USD broke & closed above 61.8 of 1.1034/1.0516 move at 1.0836. Break ideally targets 2023 high at 1.1034. However, ability to break past 1.0910 is suspect.
Focus turns to BoE rate decision-sterling bulls emboldened by UK CPI rise- likely to rise by 25bps- wouldn't be surprised to see BoE on hold. Either way, expect no further hikes after GBP agnostic to UK rate moves in recent years). Resistance 1.2340 to hold well for testing support at 1.2220.
USD/JPY downside decelerates after strong sell-off. Appears to be settling into the range 130.00 -135.00 Sooner or later 131.50 has to be reclaimed so long 130.45 is not violated .
Credit crunch and tightening of financial conditions in US doesn't augur well for services exports in Current account and for the yield seeking Capital inflows - risk of capital flight from EM distinct possibility however in keeping with broader Dollar moves, USDINR to test of the lower end of the range at 82.20 and thereafter make another attempt at 82.70.