Forex Today: US Dollar bears celebrate Fed’s dovishness

What you need to take care of on Thursday, February 2:

The US Dollar plummeted following the US Federal Reserve’s monetary policy decision. The central bank decided to hike its benchmark rate by 25 basis points (bps) as widely anticipated by market players. The statement showed that policymakers changed the wording on inflation, noting that it  “has eased somewhat but remains elevated,” although there were no other relevant changes to the document. Furthermore, it noted that the Committee believes that “ongoing increases in the target range will be appropriate” to return inflation to 2%, hinting at more rate hikes in the docket.

US Fed Chair Jerome Powell started his statement by repeating the Fed is strongly committed to reaching its 2% inflation target. He also repeated that job gains have been robust, and the unemployment rate has remained low. However, he later added that, for the first time, “we can declare that a deflationary process has begun.” On the appropriate restrictive level, Powell said that a couple more rate hikes are needed to reach it. Finally, he ended up admitting that rate cuts could take place this year “if inflation comes down much faster.” Following the event, the US Fed Terminal Rate fell to under 4.9%, while the end-2023 Fed Funds Rate fell below 4.4%, as markets are still pricing in rate cuts for this year.

European inflation eased more than anticipated in January, according to preliminary estimates. The Harmonized Index of Consumer Prices (HICP) rose at an annualized pace of 8.6%. The news helped EUR/USD to overcome the 1.0900 threshold ahead of the US Federal Reserve’s announcement, with the pair ending the American session near a multi-month high of 1.1000 afterwards. The European Central Bank will announce its monetary policy decision on Thursday.

The GBP/USD pair struggled throughout the day to extend gains beyond 1.2300, as investors await the Bank of England monetary policy decision. The BoE is set to raise rates by another 50 basis points, while market players will be looking for clues about an easy pace of tightening from March on. It settled at 1.2370, up on the broad US Dollar weakness.

Commodity-linked currencies benefited from the positive tone of Wall Street, with AUD/USD hovering around 0.7140 and USD/CAD down to 1.3280. Finally, USD/JPY trades at around 128.90.

Spot gold soared and currently hovers at around $1,950 a troy ounce.

Crude oil prices edged lower as the OPEC+ meeting began, with no production changes on the agenda. A build in US inventories as reported by EIA also weighed on crude prices, as US stockpiles were up by 4.14 million in the week ended January 27.  At the time being, WTI trades at around $76.90 a barrel.

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