Orbex Market Flash

USD Sells Off On Dovish FOMC

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As expected, the Fed kept policy unchanged at its first FOMC meeting of the year yesterday. However, the reaction was broadly one of disappointment from USD bulls, as the Fed seemed to take a more dovish tone in its statement and press conference following the meeting.

Regarding the domestic economy, labor market momentum was described as “solid,” where previously it had been described as strong, and inflation was described as “muted.”

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Notably this time, the statement no longer described risks to the economy as “roughly balanced,” suggesting that they are now skewed to the downside, nor did it reference further “gradual tightening.”

However, the real blow to USD bulls was the statement’s section on balance sheet normalization which read:

“The committee would be prepared to use its full range of tools, including altering the size and composition of its balance sheet, if future economic conditions were to warrant a more accommodative policy that can be achieved solely by reducing the federal funds rate.”

Essentially, the statement now highlights the fact that given current economic weakness, the Fed is no longer in a rush to normalize its gigantic balance sheet and could maintain or increase it going forward as necessary to buffer the economy.

During the press conference following the rate decision, Chairman Powell struck an equally cautious tone, highlighting the need for patience with regard to further rate hikes. He stated that any further tightening would depend entirely on incoming data and that, with the policy rate roughly around the level the committee deems neutral, the current policy approach is “appropriate.” He affirmed:

“The case for raising rates has weakened somewhat.”

Market Reaction & Technical Perspective

Equities investors welcomed yesterday’s meeting with the Fed chair signaling that rate hikes are now on pause for the foreseeable future, with the Fed also in no rush to normalize its balance sheet. As such we have seen a strong sell-off in USD and a rise in gold and equities.

usd index

USD Index is now once again challenging the 95.07 level support which, if broken, will bring deeper support at the 93.36 level into focus. To the topside, the 96.91 level remains the key support ahead of the 2018 highs, though for now, focus is on further downside.

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