Dollar bulls were squeezed last night as we saw some dramatic moves in FX markets with the dollar plunging after the Fed lowered its inflation and growth forecasts last night. There was every likelihood of there being a spike in volatility during and after the FOMC decision which we warned about yesterday, as well as being consistent in saying any rate hike is likely to come later than many were anticipating. As expected the word “patience” was removed and traders were caught off guard as the dollar headed lower rather than higher as Yellen clarified this did not mean inflation normalising anytime soon. The move was significant across all the majors with GBPUSD getting back above 1.5000, EURUSD exceeding 1.1000 and USDJPY touching 119.30 at its lowest, which would have triggered many stops and therefore exacerbating the moves. The initial reaction has been largely reversed overnight, although the plunge in US Treasury yields has barely see any recuperation of their losses, so doubtless to say the Fed continues to play a waiting game. They want to see a more sustainable improvement in the labour market, in particular on the wage growth front and signs that disinflation pressures are subsiding.
Now the Fed meeting is out of the way and we know the first rate hike will come later in the year, focus will revert back on the single currency as negotiations continue between Greece and its creditors in its quest to secure more funding and avert a Grexit.