- The Fed decision is dovish in quite a few ways.
- The US Dollar plunged, and the move may not be over.
The Federal Reserve made five dovish changes that sent the US Dollar down:
1) No hikes in 2019: The dot-plot is first and foremost. The Fed slashed its forecasts for raising rates from two to none at all for 2019. A single hike is due for 2020, which is still far in the future. This significant downgrade is the primary driver.
2) Balance sheet reduction program: The balance sheet reduction program (Quantitative Tightening) is set to end in September 2019. It will begin falling in May, with tapering down from $30 billion to $15 billion. This is a quicker end than many had expected: for the program to end by year-end.
3) Inflation is now "muted": The FOMC Statement describes inflation as being muted. This is a downgrade to the more neutral descriptions in the past. They also added that "On balance, market-based measures of inflation compensation have remained low in recent months."
4) Growth forecasts slashed: The Fed downgraded estimates for GDP growth from 2.3% to 2.1%. It seems that the combination of the global slowdown, the government shutdown and the petering out of the fiscal stimulus weighs on projections.
5) But unemployment forecast upgraded: The dot-plot sees the drop in the unemployment rate as nearing its end. The unemployment rate is set to bottom out at 3.7% and not 3.5% as earlier forecast.
The unanimous decision sent the greenback plunging. Is there more in store?
More falls for the USD?
Probably so, and for the following reasons:
1) Full Fed reaction takes time: Markets tend to react at the Tokyo Open and then the European open. There is no other way to interpret the decision as very dovish.
2) Yield curve: The Fed decision is felt in the bond market as well. The 10-year Treasury bond yield dropped to around 2.55%. Three-month bills are about 2.41%. While the 10-2 spread is usually quoted, the 10-year to the 3-month range is a better predictor of an upcoming recession. If we get the dreaded yield-curve inversion, things could get even worse for the USD.
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.