Dollar drops to six-week low on dovish Fed update

The U.S. dollar turned negative Wednesday, dropping to its lowest level since early February as the Federal Reserve reaffirmed its dovish policy stance.

The central bank revised its expectation of interest-rate increases in 2019 to zero, from an expected two increases previously. It also downgraded its economic outlook, forecasting 2.1% gross domestic product growth in 2019, rather than 2.3% as expected before. The PCE inflation forecast was cut to 1.8% this year, from 1.9% before. The Fed also said the unwinding of its balance sheet would end in September.

A news conference with Fed Chairman Jerome Powell began at 2.30 p.m. Eastern.

“The dovish pivot that has been in place in January was cemented… as the Fed cut the 2019 dot plots forecast from two hikes to none, [while] many expected them to bring it down to one increase,” said Edward Moya, senior market analyst at Oanda. “The Fed also sees one hike priced in for 2020, but that might not matter as many will join the camp that the next move will be a cut.”

The central bank’s hawkish monetary policy approach that led to four rate hikes in 2018 proved a continuous engine for dollar strength last year, in particular as other developed world central banks were not yet tightening policy, or not to the same extent.

“The rhetoric since the December forecasts ha changed dramatically. Today’s meeting is about realigning the two. This means that growth and inflation forecasts will be lowered,” said Marc Chandler, chief market strategist at Bannockburn Global Forex, before the update.

The ICE U.S. Dollar Index DXY, -0.58% , which had been up 0.1% ahead of the central bank’s statement, dropped 0.6% to 95.792, touching its lowest level in more than six weeks, according to FactSet.

The euro EURUSD, +0.6166% the greenback’s biggest rival, shot higher on the dollar’s weakness, last buying $1.1442, compared with $1.1353 late Tuesday.

Meanwhile, the British pound GBPUSD, -0.5050% dropped to a one-week low after Prime Minister Theresa May requested the March 29 Brexit deadline to be extended to June 30. This would likely allow the British Parliament to vote for a third time on a version of May’s Brexit deal.

The pound retraced some of its weakness as the dollar fell, but remained in the red. It last fetched $1.3249 down from $1.3268 late Tuesday. Between its session-high and low, sterling swung 1% on Wednesday.

According to a Reuters report, the European Union is concerned about a delay that leave the U.K. in the Union throughout the May EU elections, and advised the premier against it. On Monday, the speaker of the House of Commons blocked a third vote, ruling that the government would have to change the deal before putting it to a vote again. President of the European Council Donald Tusk said Parliament would have to approve May’s deal first before getting a short extension.

Check out: The risk of a long Brexit delay is on the rise

In U.K. economic data, inflation came in stronger than expectations at 1.9% year-over-year in February, compared with 1.8% expected. Core inflation, meanwhile, slipped to 1.8% year over year.

On Thursday, Bank of England policy makers meet. The central bank is considered to have its hands tied until Brexit is resolved or a clear path has emerged.

MarketWatch

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Ed Moya

Ed Moya

Senior Market Analyst at OANDA
With more than 20 years’ trading experience, Ed Moya is a market analyst with OANDA, producing up-to-the-minute fundamental analysis of geo-political events and monetary policies in the US, Europe, the Middle East and North Africa. Over the course of his career, he has worked with some of the world’s leading forex brokerages and research departments including Global Forex Trading, FX Solutions and Trading Advantage. Most recently he worked with TradeTheNews.com, where he provided market analysis on economic data and corporate news. Based in New York, Ed is a regular guest on several major financial television networks including BNN, CNBC, Fox Business, and Bloomberg. He is often quoted in leading print and online publications such as the Wall Street Journal and the Washington Post. He holds a BA in Economics from Rutgers University. Follow Ed on Twitter @edjmoya ‏
Ed Moya