Forex Today: US Dollar strengthens after Fed’s hawkish pause

During the Asian session, New Zealand will release Q2 GDP data. After the Federal Reserve, attention remains on central banks on Thursday, with the decisions from the Bank of England and the Swiss National Bank in the spotlight.

Here is what you need to know on Thursday, September 21:

The Federal Reserve kept interest rates unchanged at 5.25-5.50% in a unanimous decision. The statement showed minimal changes compared to the July meeting. In their projections, most FOMC members indicated that another rate hike might be appropriate before the year's end. Fed Chair Powell clarified during the press conference that the "dot plot" is not a plan.

NBC analysts on Fed's meeting: 

As expected, the FOMC is trying to keep alive the prospect of one final hike before the year is out. And while the implied near-term terminal rate may not be changed vs. June, the eventual implied pace of easing has been adjusted and pushed back. 

The impact of the Fed meeting will continue on Thursday when more US data is due with the weekly Jobless Claims, the Philly Fed, and Existing Home Sales.

The possibility of a US government shutdown is increasing. In order to avoid a shutdown in October, legislation needs to be passed before the end of the week.

US Treasury yields jumped, with the 10-year rising to 4.40%, the highest since 2007, and the 2-year reaching 5.17%, a level not seen since 2006. Higher yields offered a boost to the Greenback. In Wall Street, stocks failed to hold onto gains and finished lower. The Dow Jones lost 0.22%, and the Nasdaq declined by 1.53%.

The US Dollar Index jumped from 104.60 to test recent highs around 105.40 after the FOMC September meeting. The DXY has a key resistance at 105.50. 

EUR/USD sharply reversed from 1.0730 and dropped to the 1.0650 area, indicating that the bearish trend remains intact. On Thursday, the Eurozone preliminary Consumer Confidence Index for September is due. The critical economic report of the week is the PMIs on Friday.

UK inflation data surprised to the downside, affecting expectations for the Bank of England's decision. Prior to the data release, a rate hike was expected, but afterwards, the odds became more balanced, with a pause being favored. On Thursday, the BoE will announce its decision, which is likely to trigger volatility. Market participants will closely scrutinize the decision and the voting of the Monetary Policy Committee.

GBP/USD bottomed at 1.2331 after the data, then rebounded to 1.2420 before reversing following the Fed's announcement, falling to fresh lows around the 1.2330 area. 

Analysts at TD Securities on BoE and recent UK data:

Upside surprises to wage data are enough to justify a 25bps hike, but Wednesday's downside shock to August inflation and worries about tepid GDP growth and a rapidly-rising unemployment rate lead the MPC to soften forward guidance and votes skew toward a hold, effectively signalling an end to the hiking cycle.

Japanese authorities made a verbal intervention early on Wednesday when USD/JPY was trading above 148.00. The pair then pulled back, only to jump to 148.30 following the Fed's meeting later. If the pair extends its run above 148.50, intervention could take place.

USD/CHF posted its highest daily close since late May but remains under 0.9000. The Swiss National Bank will announce its decision on Thursday, which is expected to be a 25 basis points rate hike to 2%.

NZD/USD spiked to 0.5985, the highest in two weeks, only to erase all gains later and close slightly above the 20-day Simple Moving Average (SMA) around 0.5930. New Zealand will report Q2 GDP growth and Credit Card Spending on Thursday.

AUD/USD failed again to hold above 0.6500 and dropped below 0.6450 on the back of a strong US Dollar and also affected by the deterioration in market sentiment.

Metals ended on a weak note after erasing all gains following the Fed. Gold peaked near $1,950 and then tumbled to $1,930 as the Fed reinforced the "higher for longer" mantra. Silver traded above $23.50 but slid back to $23.20.