The FOMC removed its pledge to be “patient” in respect to its first rate hike, which many people anticipated ahead of the release, opening the door to a rate hike as early as June. While this remains the more popular choice in the markets, I still believe the FOMC will hold out until September and I think this statement and renewed set of economic projections supports this view.
Why September rather than June?
First and foremost, the Fed stressed that it wants to be “reasonably confident” that inflation will take off which surely requires more than a couple of months of data, given that we haven’t seen evidence of this so far. The renewed projections for growth, inflation and interest rates were all revised lower which doesn’t give the impression of an overly confident central bank and is therefore quite dovish.
*The March inflation and growth forecasts, along with the March dot plot can be found in the Fed’s March economic projections. The December dot plot can be found in the Fed’s December economic projections.
How did currency markets respond to the FOMC announcement and press conference?
The currency markets reflected this immediately, as the dollar weakened across the board. The euro quickly gained almost one cent against the dollar, or just shy of 1%, while Gold rallied more than $17 to touch a new eight day high.
Given the anticipated hawkish stance that had been priced in, there was always going to be more upside risk following the release. While the timing of the first rate hike has been what has spooked investors in the past, the slower anticipated pace of hikes has clearly offset this and more.
The more hawkish stance from the Fed has provided some relief in the sell-off in EURUSD, with the pair rallying before running into resistance around 1.08. The sell-off had been extremely strong and this more dovish stance may provide the opportunity for a larger correction before what many perceive as the inevitable move to parity.
The pair is facing significant resistance between 1.08 and 1.09 but if we see a break through here, the next major resistance could be found around 1.1050 – 1.11. At this level resistance could be found as this has previously been a strong level of support and resistance and is this time joined by a descending and 61.8 fib level – 19 February highs to 13 March lows.
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