USD Lower After Fed Keeps Interest Rate Unchanged

The April FOMC Statement Showed Few Hints of a June Rate Hike

The U.S. Federal Reserve ended its two day Federal Open Market Committee (FOMC) meeting on Wednesday with the release of an almost carbon copy of the March FOMC statement.

The Fed continues to rely on employment data to illustrate the positives of the U.S. economy along with consumer sentiment. Consumer spending has declined and inflation is still far from the 2 percent target.

The removal of the global risk language is seen as one of the few hawkish remarks by omission. The Fed put more emphasis on its monitoring activities by adding: “closely monitor inflation indicators and global economic and financial developments.”

Kansas City Fed President Esther George voted against holding rates at 0.25 to 0.50 percent but she was the again the lone dissenter in a 9-1 vote.

The EUR/USD had a muted reaction after the release of the FOMC statement. The pair touched 1.1269 before bouncing back up to 1.1360 and has traded in a tight range above 1.13 half an hour after the Fed communicated its decision to keep rates on hold with no mention of the June FOMC meeting. The monetary policy divergence that drove the USD rally in 2015 is quickly eroding away as the U.S. central bank takes a more cautious stance. The Fed is more likely to wait for the economy to “run a little hot” before being forced to raise rates, as opposed as taking a proactive stance and run the risk of hiking prematurely.

The lack of insight on the next FOMC puts the USD on the back foot as the fundamental picture of the U.S. economy has not improved considerably outside of the employment data. The American central bank is awaiting for a general improvement of the economy before hiking rates again. The December rate hike was done under different macro economic conditions. The first FOMC statements of the year included language to accentuate how deep this change was, so one of the silver linings on the April stamens is the removal of the global risks portion.

The forex market is now on the look out for the Bank of Japan (BOJ) tomorrow as the next central bank that could change the course of the market as it tries to get the Japanese economy to grow.

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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