Fed Quick Analysis: Dovish dots down dollar, why this may be a buy opportunity


  • The Federal Reserve's dot plot is signaling zero hikes through 2023. 
  • Markets foresee such a lift-off coming already in early 2022.
  • Chair Powell will likely push back against an early move.
  • Markets will likely ease up on a dovish message.
  • The dollar may temporarily soften before resuming its long-term uptrend.

Hold your horses – or at least just a bit. Only seven out of 17 Federal Open Markets Committee members foresee a rate hike in 2023 and only four in 2022. That is a dovish outcome in comparison to market pricing of the first increase in borrowing costs coming in 2022. 

Follow all the Fed developments live

The dollar is falling and stocks are rising. What does this mean for markets? 

Will Federal Reserve Chair Jerome Powell change the picture? Probably not, as while he refused to promise interventions in bond markets, the world's most powerful central banker has repeatedly stressed that the US economy is a long way to recovery. It is all about the unemployed – roughly 9.5 million people who have yet to return to their pre-pandemic jobs. 

Stocks have been suffering from brutal moves in yields. If returns on safe debt from Uncle Sam are rising sharply, shares become rapidly less attractive. However, gradual upside moves are welcome as they reflect a return to pre-pandemic growth, which is positive for Wall Street companies. 

The Fed's message is supportive of the latter – gradual moves that allow shares to move up in tandem with yields. 

For the dollar, it is another story – a difference between the short term and the longer one. In the short term, the pushback against raising interest rates is adverse for the value of the dollar. 

However, the Federal Reserve's support of the economy joins President Joe Biden's $1.9 trillion stimulus bill – with trillions in infrastructure coming. Moreover, America's vaccine campaign is also moving at a rapid clip, 

All in all, the US economy is set to grow fast – something the Fed has acknowledged in another part of its dot plot – and the greenback is set to rise. It is essential to note that ten-year Treasury yields have quickly recovered from their downside knee-jerk move. It is around 1.65% at the time of writing. 

Will the dollar remain low if the US economy and yields surge higher? Probably not. 

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.

Feed news

How do emotions affect trade?
Follow up our daily analysts guidance

Subscribe Today!    

Latest Forex Analysis


Latest Forex Analysis

Editors’ Picks

EUR/USD battles with 1.1700 as the market mood turns sour

Poor German data and renewed concerns about a default of the Chinese Evergrande property giant undermined investors’ sentiment, pushing them into the dollar’s safety.

EUR/USD News

GBP/USD accelerates its slump, trades around 1.3650

GBP/USD is under strong selling pressure, trimming most of its post-BOE gains. Concerns about the global financial health and slow moves towards tapering weigh on markets.

GBP/USD News

XAU/USD hangs near multi-week lows, around $1,745 ahead of Powell

Gold struggled to capitalize on its attempted intraday recovery move. Hawkish Fed/BoE, rising bond yields acted as a headwind for the metal. Resurgent USD demand exerted additional pressure on the commodity.

Gold News

PBoC imposes ban on crypto trading as it fosters ‘illegal financial activity’

PBoC bans crypto trading activities and a plethora of associated services, labeling it “illegal.” Overseas cryptocurrency exchanges providing services to Chinese residents will be investigated in accordance with the law. 

Read more

Evergrande, VIX and yields make for choppy day ahead

Equity markets remain focused on Evergrande as rumours of a possible default on overseas debt swirl. The market appears to be on the hunt for negative news, which leads us to conclude that stocks are going lower in the short term.

Read more

Majors

Cryptocurrencies

Signatures