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Dollar Retreats Post FOMC Due to Profit-Taking

The Fed announced a rate hike by 25 basis points yesterday, with rates in a range of 0.75% to 1%, in line with market expectations. Fed Chair Yellen stated that It is appropriate to gradually remove accommodation, as the US economy is going well. Gradual rate hikes will be appropriate over the next few years, to sustain the economic expansion.

Based on the economic projection made in December the medium economic projection is, essentially, unchanged. The medium projection for the federal funds rate is 1.4% to the end of 2017, 2.1% to the end of 2018, and 3% to the end of 2019. Therefore, we can expect two more rate hikes from the Fed by the end of this year, with a rate hike in June or July being highly likely.

Medium projection for GDP growth is 2.1% in 2017 and 2018, and down to 1.9% in 2019. Medium projection for unemployment is 4.5% in Q4 and over the next two years. The medium projection for PCE is 1.9% this year and is expected to rise to 2.0% in 2018 and 2019.

Yellen commented that the economy continues to expand at a moderate pace with the labor market seeing continuous improvements. The unemployment rate was 4.7 percent in February which near its recent low. Solid income gains have supported household spending growth. The Fed also expects job conditions to strengthen further. Business investment has firmed; with business sentiment at a favorable level.

Personal consumption expenditure rose to nearly 2% in January largely driven by energy prices. The Fed expects core inflation to move up and overall inflation to stabilize around 2% over the next few years. The Fed expects the economy to expand at a moderate pace over the next few years.

Nevertheless, USD plunged after the release of the rate decision due to profit-taking pressure, as markets have largely priced in since February. The fall of USD pushed other major currencies up. Spot gold surged from the significant support level at $1200, touching a 1-and-a-half week high of $1228.76. EURUSD surged more than 120 points hitting a 5-week high of 1.0745. GBPUSD surged more than 110 points hitting a 2-week high of 1.2308.

Be aware of further profit-taking pressure and retracements post these substantial surges.

Earlier today, during the early Asian session, the Bank of Japan announced that their monetary policies remain steady which was in line with expectations. Rates remain unchanged at -0.1%, 10-yr bond yields remain at a level near zero & asset purchases will remain at about 80 trillion JPY a year.

The BoJ stated that “Japan’s economy has continued its moderate recovery”. Moreover, the BoJ didn’t give hints on any future rate hikes resulting in rates likely remaining at current levels for an extended period as it hasn’t seen a sustainable pickup in inflation.

This morning, the Swiss National Bank announced that interest rates remain at -0.75%.

The Bank of England will announce its rate decision and monetary policies at 12:00 GMT today. Market expectations are predicting that UK rates will remain unchanged.

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