Dollar Trades Stronger After FOMC Hints at March Rate Increase
The United States dollar trades stronger against its major trading partners early Thursday after the Federal Open Market Committee (FOMC) statement Wednesday afternoon showed a clear expectation that rates will increase at the March 15-16 meeting.
The FOMC said that it would “soon be appropriate” to increase the federal funds rate and Fed Chairman Jerome Powell said in his post-meeting comments that the FOMC will consider a rate increase at the March meeting if conditions are appropriate.
Powell did not specify how many rate increases were possible in 2022, leading markets to believe that three rate hikes pencilled in for the December Summary of Economic Projections will be adjusted higher in the March update.
Powell noted that there are risks from the omicron variant but said that health experts expect that current spike in cases to diminish faster than previous waves. Read: Dollar Trades Mixed Ahead of FOMC Meeting
The Fed did not provide the timing for a reduction in its balance sheet holdings but said that the reduction would be in a predictable manner and overtime in a separate statement.
Data on weekly initial jobless claims and the first look at Q4 GDP will be released Thursday morning, followed by personal income, and spending for December and the final Michigan Sentiment index for January on Friday.
A quick summary of foreign exchange action heading into Thursday shows that GBP-USD fell to 1.339 from 1.3466 at the Wednesday US close and 1.3518 at the same point a day ago. The pair was at 1.3504 just before the FOMC announcement Wednesday afternoon and plunged rapidly after.
A survey of UK retail sales released earlier Thursday was better than expected but still indicated that sales are soft and are likely to remain that way over the next few months. Markets are expecting a rate increase at the Bank of England’s meeting on Feb. 3 as a protection against rising prices and wages.
Until then, political scandals are taking centre stage, a report on Prime Minster Boris Johnson’s conduct due on Thursday or Friday. EUR-USD fell to 1.1160 from 1.1242 at the Wednesday US close and 1.2772 a day earlier.
Like GBP-USD, the pair fell from a high of 1.129 right before the FOMC announcement to 1.1241 after and then continued lower as the European Central Bank’s statement on Feb. 3 is expected to appear dovish next to the FOMC’s hawkish track.
Germany’s consumer climate forecast improved in data released earlier on Tuesday but remain negative. Tensions in Ukraine have been pushing the euro lower over the last week.
USD-CAD rose to 1.2696 from 1.2667 at the Wednesday US close and 1.2566 a day earlier. The pair received its first boost on Wednesday from the disappointing Bank of Canada announcement, then fell back slightly before surging on FOMC’s statement.
The Bank of Canada (BOC) left rates unchanged due to concerns about rising COVID-19 cases, surprising markets that had overwhelmingly expected a rate increase, but did update their forward guidance to suggest a rate increase in March is on the table. There are no Canadian data scheduled for Thursday.
USD-JPY jumped to 115.25 from 114.6744 at the Wednesday US close and 114.1732 a day earlier, with the increase starting in response to the FOMC’s statement and continuing since then as the yield differential widened.
There were no Japanese data released overnight. #Dollar Trades Stronger After FOMC Hints at March Rate Increase
