As we noted in yesterday’s FOMC Preview report, the US central bank was never going to make any immediate changes to policy, leaving traders to read Powell and Company’s tea leaves for implications about future tweaks. As it turns out, the tea leaves were clear: The Fed has undergone a major dovish shift.

Even relative to the market’s dovish expectations, the FOMC came off as worried about the US economy:

  • The median policymaker now expects US GDP to rise just 2.1% in 2019 (down from 2.3% in December)
  • The median CPI forecast for 2019 was also cut to 1.8% (from 1.9% in December)
  • The median interest rate forecast for the end of the year is 2.25-2.50%, unchanged from current levels. 11 of the 17 potential voters now anticipate that the central bank will remain on hold until 2020.
  • Only one rate hike is expected in 2020, according to the median “dot.”
  • The central bank will end its balance sheet runoff at the end of September.

All of these tweaks signal that the central bank is concerned about the US economy and traders have taken notice. According to the CME’s FedWatch tool, the market is pricing in nearly a 40% chance of a rate cut this year, up from around 25% yesterday. Given the scope of the Fed’s negative revisions, we wouldn’t be surprised to see this number rise further in the coming days.

Market Reaction

Not surprisingly, the big shift in the market’s outlook about Fed policy is also being felt in more traditional markets. The US dollar has fallen by at least 60 pips against all its major rivals, with the US dollar index shedding -0.60% as of writing. Gold and oil have caught a bid on the weakness in the greenback, while major US stock indices have recovered into positive territory on the prospect for lower interest rates in the future.

The biggest move has been in the bond market: The 10-year US Treasury yield is dropping a full 9bps on the day to 2.53%; a close here would mark the largest single-day rally in bonds (fall in yields) since last May. Meanwhile, the 2-year Treasury bond is trading off by 8bps itself to yield just 2.40%.

While we believe that economic data in the coming months may show that the Fed’s dramatic shift is an overreaction, we wouldn’t be surprised to see continued weakness in the buck, strength in stocks/commodities, and further drops in yields while the market “catches up” to the central bank’s new posture.

This research is for informational purposes and should not be construed as personal advice. Trading any financial market involves risk. Trading on leverage involves risk of losses greater than deposits.

Analysis feed

Latest Forex Analysis

Editors’ Picks

EUR/USD: Stuck in a range, the odds of an aggressive Fed rate cut drop

EUR/USD continues to trade a narrow range amid falling odds of an aggressive easing by the US Federal Reserve (Fed) later this month. The ECB is widely expected to keep rates unchanged, but send out a strong dovish message later this week

EUR/USD News

GBP/USD remains modestly flat as Brexit optimism confronts UK-Iran tension

While optimism surrounding the Brexit helped the GBP/USD pair to start the week on a positive note, geopolitical tensions between the UK and Iran tamed the quote’s upside as it trades near 1.2500 ahead of the London open. 

GBP/USD News

USD/JPY consolidates gains below 108.00 amid risk-off in Asian equities

Having failed to sustain the early gains above the 108 handle, USD/JPY consolidates in a tight range just below the last amid risk-off action in the Asian equities and Abe's victory. Escalating Gulf tensions and a likely smaller Fed rate cut weigh down on the sentiment. 

USD/JPY News

Forex Today: USD cheers Fed’s policy repricing, Gulf tensions rise, and Oil surges

US dollar index rises on falling odds of aggressive Fed rate cuts. Oil surges on escalating Gulf tensions. All eyes on trade and geopolitical developments.

Read more

Gold: Bounces off 23.6% Fibo. towards $1436.50/37 supply zone

Gold is again being bought as it reverses from 23.6% Fibonacci retracement of June-July advances to $1,427 by early Monday. The yellow metal now runs towards $1,436.50/37 horizontal resistance comprising early-month tops.

Gold News

Majors

Cryptocurrencies

Signatures