- The Federal Reserve left the interest rate unchanged as expected but made some tweaks to the statement.
- An acknowledgment of slower growth and a hint that higher inflation may be tolerated stand out.
- Profit-taking may have also played a significant role in the reaction.
The Federal Reserve left the interest rate unchanged at 1.50% to 1.75% as widely expected. Markets took their time with reacting to the statement before the US Dollar dropped.
Why the Dollar dropped
1) Symmetric inflation: The word "symmetric" was added to the statement in referring to the inflation target. Markets see this is a hint that the Fed may allow inflation to run high for some time after it has run low for quite a while. Allowing higher inflation means not raising rates too fast.
2) Moderation: The Federal Reserve used to the word used by ECB President Mario Draghi to describe the slowdown. The economy is seen as growing at a moderate rate, and household spending has moderate since Q4.
3) Future now unknown: The Fed also removed the line saying that the outlook has improved. If the prospects are not better, there is no reason to accelerate raising rates.
4) Profit-taking: The last reason the US Dollar fell on the FOMC is the rise of the US Dollar beforehand. The greenback gained ground in the hours prior to the publication and in the past several weeks. This came hand in hand with rising bond yields. A more hawkish statement may have already been priced in, and profit taking makes a lot of sense after such solid moves.
All in all, the combination of some cautious words and profit-taking weighed on the US Dollar. What is next? The US economy continues outperforming other major economies on growth and inflation. A resumption of the rises may come after the dust from the May FOMC settles. And as always, markets will be data-dependent, and Friday's Non-Farm Payrolls report is of high importance.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended Content
Editors’ Picks
EUR/USD stays below 1.0900 as Q1 comes to an end
EUR/USD has lost its traction and declined below 1.0900 in the American session on Friday. Quarter-end flows seem to be allowing the US Dollar find some demand but the risk-positive market environment seems to be limiting the pair's downside ahead of the weekend.
GBP/USD trades below 1.2400, looks to post weekly gains
GBP/USD has edged lower after having tested 1.2400 earlier in the day but remains on track to end the third straight week in positive territory. The upbeat mood remains intact after soft PCE inflation data from the US, making it difficult for the US Dollar to continue to gather strength.
Gold tries to stabilize near $1,980 following earlier spike
Gold price has returned to the $1,980 area following a spike above $1,987 with the initial reaction to lower-than-expected PCE inflation figures from the US. Meanwhile, the benchmark 10-year US Treasury bond yield stays in the red near 3.5%, providing support to XAU/USD.
Will Dogecoin price pull an XRP and rally 60% next week?
Dogecoin price has been in a tight range bound movement since November 22. The recent recovery above the range low looks promising and hints at an explosive move for next week.
Week ahead – Nonfarm payrolls to set the tone for US dollar
With the banking turmoil receding, market participants will turn their attention back to economic releases. The spotlight will fall on the US employment report.