• 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.

More: EUR/USD approaches 1.2000 on steady Fed

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


Recommended Content

Editors’ Picks

USD/JPY pops and drops on BoJ's expected hold

USD/JPY pops and drops on BoJ's expected hold

USD/JPY reverses a knee-jerk spike to 142.80 and returns to the red below 142.50 after the Bank of Japan announced on Friday that it maintained the short-term rate target in the range of 0.15%-0.25%, as widely expected. Governor Ueda's press conference is next in focus.  

USD/JPY News
AUD/USD bears attack 0.6800 amid PBOC's status-quo, cautious mood

AUD/USD bears attack 0.6800 amid PBOC's status-quo, cautious mood

AUD/USD attacks 0.6800 in Friday's Asian trading, extending its gradual retreat after the PBOC unexpectedly left mortgage lending rates unchanged in September. A cautious market mood also adds to the weight on the Aussie. Fedspeak eyed. 

AUD/USD News
Gold consolidates near record high, bullish potential seems intact

Gold consolidates near record high, bullish potential seems intact

Gold price regained positive traction on Thursday and rallied back closer to the all-time peak touched the previous day in reaction to the Federal Reserve's decision to start the policy easing cycle with an oversized rate cut.

Gold News
Ethereum rallies over 6% following decision to split Pectra upgrade into two phases

Ethereum rallies over 6% following decision to split Pectra upgrade into two phases

In its Consensus Layer Call on Thursday, Ethereum developers decided to split the upcoming Pectra upgrade into two batches. The decision follows concerns about potential risks in shipping the previously approved series of Ethereum improvement proposals.

Read more
Bank of Japan set to keep rates on hold after July’s hike shocked markets

Bank of Japan set to keep rates on hold after July’s hike shocked markets

The Bank of Japan is expected to keep its short-term interest rate target between 0.15% and 0.25% on Friday, following the conclusion of its two-day monetary policy review. The decision is set to be announced during the early Asian session. 

Read more
Moneta Markets review 2024: All you need to know

Moneta Markets review 2024: All you need to know

VERIFIED In this review, the FXStreet team provides an independent and thorough analysis based on direct testing and real experiences with Moneta Markets – an excellent broker for novice to intermediate forex traders who want to broaden their knowledge base.

Read More

Majors

Cryptocurrencies

Signatures