Investing.com -- EUR/USD rose moderately on Wednesday, as the Federal Reserve reiterated a plan to normalize monetary policy gradually and investors reacted to a wave of downbeat geopolitical and economic data in Asia and the Middle East.
The currency pair traded in a broad range between 1.0711 and 1.0839 before settling at 1.0783, up 0.30% on the session. With the modest gains, the euro halted a four-day skid dating back to the last trading day of 2015. The euro has still closed lower against the dollar in six of the last eight trading days. Over the last month of trading, the euro is relatively flat against the dollar down approximately 1% during the period.
EUR/USD likely gained support at 1.0556, the low from November 30 and was met with resistance at 1.1059, the high from Dec. 15.
The minutes from the Federal Open Market Committee's (FOMC) December meeting, released on Wednesday, showed that all of its voting members were in agreement that labor market and inflation conditions at the time were appropriate to raise short-term interest rates modestly by 25 basis points. Last month in a historic decision, the FOMC abandoned a seven-year zero interest rate policy by approving its first rate hike in nearly a decade. Previously, the FOMC's benchmark Federal Funds Rate, remained at a zero bound range between zero and 0.25% for every meeting dating back to December, 2008. Furthermore, the members agreed that all subsequent rate hikes would be gradual and would remain low in the long-run future for some time.
Market players are closely parsing Fed statements for clues on the path of tightening the U.S. central bank embarks on as it continues to normalize monetary policy. Earlier on Wednesday, Fed vice chairman Stanley Fischer said in an exclusive interview with CNBC, that estimates of four interest rate hikes in 2016 were in the right "ballpark." In long-range forecasts issued last month, the FOMC estimated that the upper range of its benchmark Federal Funds Rate will increase by 1.0% by the end of 2016 to 1.5%.
At the same time, there may be some dissension between FOMC on the timing of further hikes, as the December minutes indicated that several members viewed last month's lift-off as a "close call." Furthermore, the minutes showed that those participants would need "greater confirmation," that inflation is moving toward the Fed's objective of 2% before they approved the next rate hike. Long-term inflation has remained under the Fed's targeted goal for every month over the last three years.
Any rate hikes are viewed as bullish for the dollar, as foreign investors pile into the greenback in order to capitalize on higher yields.
The FOMC cited an uncertain inflation outlook, a subdued neutral real interest rate and a lack of flexibility for stabilizing the economy in the case of unanticipated economic shocks for factors in why it plans to raise rates gradually.
"Gradual adjustments in the federal funds rate would also allow policymakers to assess how the economy was responding to increases in interest rates. In addition, by several estimates, the neutral short-term real interest rate was currently close to zero and was expected to rise only slowly as headwinds restraining the expansion receded," the FOMC said in the statement. "Moreover, the ability of monetary policy to offset the economic effects of an unanticipated economic shock remained asymmetric, and a cautious approach to normalizing policy could help minimize the risk of having to respond to a negative economic shock while the policy rate remained near its effective lower bound."
Elsewhere, currency traders reacted to downtrodden geopolitical and economic news in Asia, as North Korea announced that it successfully detonated a miniature hydrogen bomb on Wednesday morning, while China said activity in its service sector in December fell to its lowest level in 17 months. While the apparent escalation of North Korea's nuclear capabilities spooked markets throughout Asia and sent a ripple effect through equity markets around the world, a host of experts expressed intense skepticism that Wednesday's test contained a highly-destructive hydrogen bomb. The test triggered a 5.1 magnitude earthquake, according to the United States Geological Survey, nearly matching the Richter scale readings of three other tests conducted by North Korea since 2006. The size of the tremor is generally regarded as too small for a hydrogen test. In China, the yuan fell to a fresh five-year low against the dollar as the People's Bank of China (PBOC) set the onshore yuan midpoint at 6.5314 per dollar, its weakest fixing since 2011. The South Korean won, meanwhile, fell to its lowest level in four months.
The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, reversed territory late in Wednesday's session to close at 99.30, down 0.17%. The index halted a six-day winning streak.