The U.S. dollar traded sharply lower against all of the major currencies after the Federal Reserve left interest rates unchanged. The decision to keep rates steady was not a surprise nor was the change in the highly anticipated dot-plot forecast but the magnitude of the dollar’s reaction signals that investors were waiting for a reason to sell dollars. The dot plot show Federal Reserve officials looking for 2 rate hikes this year which is less than the 4 rate hikes projected back in December but still more than the 80% chance of a 25bp rate hike priced in for 2016 before FOMC. But investors punished the dollar because Janet Yellen failed to emphasize that 2 more rate hikes are expected this year and instead spent the large part of her testimony talking about the troubles in the U.S. and global economy. The Fed is worried about exports, business investment, drilling activity and wage growth. When pressed on the rise in oil prices and the impact on inflation, she said the oil rise alone wouldn’t have a major impact on policy because the FOMC generally looks through oil price movements.
Yet there are a few things in today’s FOMC announcement that leads us to believe that losses in the dollar will be limited. First and foremost, the Fed is still looking for 2 more rate hikes this year, which is 2 more than any other major central bank. Janet Yellen talked a lot about how the dot plot reflects individual views that and noted the considerable uncertainty in each participant’s forecast. She also said the forecasts aren’t a preset plan, commitment or promise of action. By downplaying the significance of the dot plot, she implies the potential for more or less action from the Fed. While this could be interpreted to mean that the Fed could forgo raising rates completely in 2016, her expectation that U.S. growth will run above potential, her view that every meeting including April is live for tightening and their decision to provide no guidance on the balance of risks suggests that there’s still support for tightening in 2016. In fact Fed President George voted for a rate rise this month. 111 is the bottom of the recent range in USD/JPY and we believe that losses in the currency pair should be limited to 112.
Meanwhile the baton is passed to the Swiss National Bank and Bank of England tomorrow. Like the Fed, no changes are expected and between the two, the SNB rate decision should be less interesting. We’ve seen more improvements than deterioration in Switzerland’s economy since their December meeting. The SNB should be encouraged by these developments and the lack of appreciation in the Swiss Franc after the ECB’s easing. With that in mind, negative rates will remain for some time.
Sterling traded extremely well on the back of the Federal Reserve’s monetary policy announcement but like U.K. Chancellor Osborne, the Bank of England could warn of the economic instability that would transpire if Britain leaves the European Union. Osborne rolled out sweeping changes in taxes as a way to boost growth. This includes a cut in corporate taxes and a new sugar tax on soft drinks. They also lowered the GDP forecast from 2.4% to 2%. This morning’s U.K. employment numbers were better than expected with the claimant count rate falling and average weekly earnings rising. Since February we’ve seen both improvements and deterioration in the U.K. data so the Bank of England is likely to keep their overall view on the economy unchanged.
The best performing currencies today were the commodity currencies, which benefitted from the surge in commodity prices and the decline in the U.S. dollar. Thanks in part to a sharp drop in inventories oil prices jumped nearly 6% taking USD/CAD to its weakest level in 4 months. The Australian and New Zealand dollars also soared ahead of tonight’s NZ GDP and Australian employment numbers. AUD in particular experienced strong moves and if tonight’s employment report fails to impress the currency could fail again at 76 cents. We also have RBA Edey speaking and he may take the opportunity to talk down AUD/USD, which soared from a low near 69 cents to a high near 76 cents in 2 months.
Finally EUR/USD rose to a fresh 1 month high following the FOMC announcement. There’s some minor resistance at 1.1250 and more significant resistance at the February high near 1.1376. No major Eurozone economic reports are scheduled for release this week and so risk appetite will determine how the currency trades.