USD Drops After Dovish FOMC

The release of the FOMC statement and economic projections put downward pressure on the U.S. dollar. The USD was weaker across the board versus majors. The statement by the U.S. Federal Reserve was interpreted by the market as more dovish than expected. Inflation expectations and corporate investments remains low, with the lone stand out being a strong employment component. The Fed had been optimistic in signalling 4 rate hikes in 2016 and now the forecasts have pegged them closer to the market expectations of 1 or 2 rate hikes.

Investors’s trust in central banks has eroded after being crowned saviours of the global economy after the credit crisis. Now a strong communication strategy is key as markets react with wild outcomes if central banks don’t push a clear message forward.

The EUR/USD pair is trading at ​€1.1205 and looks set to gain further unless Fed Chair Yellen’s press conference introduces a possibility of a interest rate hike in June. Commodity currencies were the biggest winners after the FOMC as the price of oil had given them a head start as the OPEC-Russia output freeze is closer to reality after a date has been set for a summit in April.

The Fed has aggressively scaled back their outlook after hiking in December. The USD is getting no support from central bank rhetoric as the U.S. central bank will only raise the interest rate gradually in 2016, citing macroeconomic headwinds from abroad.

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza