Forex today: Fed's plot forecasts just three 2018 rate hikes, not four, dollar tanks

• Fed raised their target interest rate to 1.50-1.75 pct.
• Pound is propelled higher on a number of counts.

Forex today was all about the FOMC, while the pound continues along its northerly trajectory, boosted by some impressive UK jobs/wages data. The RBNZ was a non-event.

The UK data was showing a 2.8% gain in average earnings to 2.8% (highest since late 2015) and a nudge lower in the ILO unemployment rate. This comes ahead of the BoE this week where markets will be looking for a hawkish hint towards a rate hike in May where the market has already factored in 19bps of tightening. 

As for the Fed, as expected, they raised their target interest rate to 1.50-1.75 pct. However, the dollar got a shoeing as they see just two more rate hikes this year for a total of three, not four, (Fed sees three more in 2019, that were previously at just two hikes). However, Powell noted that there was little evidence of accelerating inflation, propelling the downside in US yields and the greenback.

"The Federal Reserve FOMC decision noted that the “outlook has strengthened” and boosted 2018 and 2019 GDP growth projections. Markets were evidently bracing for a more hawkish pivot by the Fed, especially in the 2018 "dots" which drifted higher, but not enough to lift the median beyond the existing 3 hikes for the year. The 2019 median increased to three hikes from two, capturing the newfound emphasis on "further" gradual hikes while the long-run rate drifted to 2.875% from 2.75%.

In the subsequent press conference, perhaps the most market-sensitive quote from Fed chairman Jay Powell was that there is “no sense” in the data that we are on the cusp of an acceleration in inflation. This looked to have cooled US yields and USD after an initial bounce. The 10 year Treasury yield rose from 2.89% pre-statement to 2.93% then back to 2.89% after the press conference. The 2 year Treasury fell from 2.35% to 2.31%," analysts at Westpac explained. 

The DXY dropped to 89.634 from 90.400, -0.80% for the day. As for other currencies, after opening in Asia yesterday 0.78% lower at 1.2240 (USD and US yields were broadly firmer) due to a holiday in Tokyo and the FOMC around the corner, the single currency had been steady into European markets between 1.2240/60 the high, climbing to score 1.2290 in London. There was a chop in NY ahead of the FOMC main event between 1.2295 and 1.2255. EUR/USD headed into the event at 1.2275 and then volatility played out until a demand came in at 1.2250. EUR/USD rallied on a weaker dollar and rested up just below short-term resistance in the 1.2345/60 zone for the close at 1.2342. 

GBP/USD, opening in Asia 0.18% lower on broad USD strength, was stuck in a tight range between 1.4000/15 until demand came in during the European session on the jobs data. GBP/USD hit 1.4070 before 1.4085 18th March resistance where the UK earnings beat underpins a hawkish outlook for two to three BoE hikes this year. The NY range was between 1.4042-1.4135 for a 1.4141 close. 

The cross was in a range of between 0.8708/43 in NY after sliding in late Asia at the start of this week on Brexit optimism and extending the downside through European markets on Tuesday. The 0.8755 double top capped the minor recovery attempts in Asia and the European bears pilled in again. Then came the UK wage data where the bid in the pound over the euro was propelled on the basis of the divergence between the BoE and ECB. EUR/GBP closed at 0.8725.

On a stronger dollar and yields, USD/JPY opened 0.41% higher at 106.53 in Asia on Tuesday, just below the Kijun Resistance line at 106.57 that has held since Jan 10, but remained subdued until the European markets came in, extending the downside from Aisa lows of 106.44 to 106.25. New York was volatile around the FOMC, but the yen was less so than some of the others currencies, contained still below the Kijun resistance. A low of 105.87 was scored ad 106 was pierced again into the close for a price of 106.07.

As for the antipodeans, the RBNZ was a non-event and there was no discernible market reaction to the release. Instead, the Kiwi remains subject to dollar flows and rallied to 0.7245 on the event within a days range of between 0.7153 and aforementioned high, closing at 0.7226. AUD/USD drifted higher to 0.7702 in Asia as the dollar gave back some gains from 0.7682 while in European markets, 0.7680 was tested to the downside before the FOMC event where some shorts were covered to 0.7720 on the lead in. AUD/USD rallied to 0.7780 on the outcome and closed at 0.7764 with a bid on the commodity sector. 

Key notes from US session:

• Fed’s Powell: unemployment rate remained low in Feb
• Fed's Powell taking questions: FOMC participants brought up issue of tariffs
• Gold bulls cannot break 1330 as Fed raise 25bp
• GBP/USD: holds a strong technical bias despite 2019 hawkish FOMC, 1.4160 next?

Key events ahead:

Analysts at Westpac offered their outlook for the next key events as follows: "At 11:30am Syd we see Australia’s data highlight for the week, February labour force. The report is always closely watched but given that employment has risen for a record 16 consecutive months, a single month’s survey will not change the overall picture of swift job creation but limited impact on the unemployment rate. The consensus is for a 20k rise in total employment and for the unemployment rate to hold at 5.5%, just above 5 year lows. Westpac is on 25k and 5.5%.

Monetary policy decisions are due today by the central banks of Indonesia, the Philippines and Taiwan. Key rates are expected to remain 4.25%, 3.0% and 1.375% respectively, but with interest in the accompanying commentary.

In the Eurozone, we will see advance March readings on manufacturing and services sentiment. The composite Eurozone index rose from under 53 late 2016 to as high as 58.8 in January 2018, a very strong reading. It eased to 57.1 in Feb and is expected to cool a little further. The ECB will be paying attention.

A very busy London session also includes the EU leaders summit, Germany March business sentiment from IFO, UK Feb retail sales data and the Bank of England MPC decision. A steady hand at 0.5% is priced around an 85% chance. May 10th is seen as the more likely time for a rate increase, >65% priced in. The MPC will release plenty of information alongside the decision – a statement, the voting split and minutes.

The US data calendar is low tier, not offering much distraction from the aftermath of the FOMC meeting."