US Dollar Plummets as “Patient” Withdrawn

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.

Economic Projections
Dot Ploy

*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.

EURUSD Daily

 

The full transcript from Chair Janet Yellen’s press conference can be found here and the press release here.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Craig Erlam

Craig Erlam

Senior Market Analyst - UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.
Craig Erlam