Fed Quick Analysis: No news is good news for the dollar, at least until Congress moves

  • The Federal Reserve's projections reiterate the message of low rates. 
  • Growth is forecast to return to pre-pandemic levels only by the end of 2021.
  • The cautious message may boost the dollar, weigh on sensitive stocks.
  • Focus shifts to Congress, where there is fresh hope for a deal.

Read my dot-plot, no new rate hikes – that is the message from the Federal Reserve. The new projections are pointing to low chances of higher borrowing costs in 2023, certainly not beforehand. That is merely a repeat of the previous messages by the Fed, as published in June. 

The accompanying statement has undergone a change, committing to an average inflation target – yet that is also unsurprising given the dovish policy shift that Federal Reserve Chairman Jerome Powell delivered in late August. 

The new growth projections show a shallower contraction in 2020 – 3.7% against -6.5% last time – but also a softer bounce in 2021, 4% instead of 5%. Overall, a return to 2019 output levels are due only by the end of next year – a Nike-swoosh recovery. The Fed remains concerned about downside risks coming from coronavirus. 

With a cautious message and no real news about rates, markets may need more help from the central bank to recover. However, the Fed only commits to doing what is necessary – nothing imminent. It makes sense for civil servants not to rock the boat in their last decision ahead of the elections.

Yet for markets, it is a disappointment. Stocks have already been climbing down the high trees they hit in late August and they remain sensitive. The US dollar has also managed to halt its fall. This decision may extend the greenback's recovery and equities descent. 

With the Fed refraining from rocking the boat, the focus shifts to elected officials. After a long deadlock, there is new hope for a new fiscal relief package. Democrats and Republicans are reportedly making progress toward a deal worth around $1.5 trillion.

Details are still lacking and nothing is certain, but it seems that the unimpressive rise in August's retail sales may have injected new life into talks. The meager 0.6% increase in headline expenditure – and drop of 0.1% in the control group – show that the lapse of government support in late July is hurting the economy. 

With the Fed out of the way – and unhelpful to markets – the next rally depends on lawmakers. Without progress there, stocks could fall and the safe-haven dollar could rise. 

See Retail Sales Quick Analysis: Miserable figures good for gold as fiscal help could come sooner

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.

Analysis feed

FXStreet Trading Signals now available!

Access to real-time signals, community and guidance now!

Latest Analysis

Latest Forex Analysis

Editors’ Picks

EUR/USD hits fresh one-month low amid souring market mood

EUR/USD has been extending its falls and dips below 1.21 as US retail sales badly disappointed and the worsening mood is supporting the safe-haven dollar. Markets digest Biden's stimulus plan. US Consumer Sentiment declined to 59.2 points. 


GBP/USD retreats toward 1.36 amid fresh dollar strength

GBP/US has pared its gains and falls toward 1.36 as the dollar gains ground. The UK economy shrank by 2.6% in November, better than estimated. The UK is ramping up its vaccination campaign and PM Johnson is pressured to ease the lockdown. 


Gold extends sideways grind near $1,850

The XAU/USD pair registered small daily gains on Thursday but struggled to extend its recovery amid a lack of significant fundamental drivers on Friday. As of writing, the pair was up 0.15% on a daily basis at $1,849.

Gold news

Forex Today: Markets “sell the fact” on Biden's stimulus, dollar rises, retail sales eyed

Markets are on the back foot after Biden hinted about tax hikes while introducing stimulus. The safe-haven dollar is edging higher despite Powell's pledge to keep monetary policy accommodative. 

Read more

DXY breaks above key downtrend, eyes move above 91.00

USD has been strongly supported on what has shaped up to be a very much risk off final trading day of the week. Most G10/USD pairs have seen significant weakness, aside from CHF/USD and JPY/USD, given that the two currencies are also considered “safe havens”.

US Dollar Index News

Forex Majors