FOREX: Dollar Jumps after Fed Pulls Interest Rate Hikes into 2023

FOREX: Dollar Jumps after Fed Pulls Interest Rate Hikes into 2023

FOREX: United States dollar jumps after Federal Reserve pulls interest rate hikes into 2023 following an improved economic data. The dollar was roughly unchanged before Wednesday’s Federal Open Market Committee announcement but gained against six major currencies.

The dollar jumped against a basket of currencies after the Federal Reserve (Fed) brought forward its projections for the first post-pandemic interest rate hikes into 2023, citing an improved health situation and dropping a longstanding reference that the crisis was weighing on the economy.

The dollar index DXY, which tracks the greenback against six major currencies, was up 0.41% at 90.901, its highest since May 7.

FOREX: Dollar Jumps after Fed Pulls Interest Rate Hikes into 2023
Dollar

While the FOMC left rates unchanged and did not alter its asset purchase program, changes to economic projections showed sharply higher inflation and stronger gross domestic product (GDP) growth estimates for 2021 and the belief that rate hikes could come sooner than expected.

The Summary of Economic Projections, SEP, shows that seven participants see the first rate increase in 2022, up from four in the March SEP and 13 participants see higher rates by the end of 2023, up from seven previously.

The middle dot for 2023 now rests in the 0.50% to 0.75% range, pointing to two 25-basis point rate hikes from the 0.00% to 0.25% current range.

Fed Chairman Powell acknowledged that the Committee did discuss its progress toward its goals but cautioned that conditions are “a ways away” from the levels needed to begin the removal of accommodation. He also cautioned that given the uncertainty in the outlook, the SEP dots should be “taken with a big grain of salt.”

A summary of Wednesday’s foreign exchange action: EUR-USD ranged between 1.2128 and 1.2110 since the US open, as traders remained sidelined into the FOMC announcement.

The pairing later sliced through its 50-day moving average at 1.2106 following the Fed, and took the euro to under 1.2010, a one-month low, as the dot plot suggest rate hikes could begin sooner, lifting the dollar.

GBP-USD edged out a four-day high at 1.4133 in London and remained firm into the FOMC announcement due to stronger UK CPI. However, those gains were wiped out by the FOMC statement, with the pair falling to one-month lows of 1.4004 later in the day.

USD-JPY eased back from 110.14 highs seen in Asia, basing at 109.80 in early US in pre-FOMC trade.

The pairing failed to breach Tuesday’s eight-session high of 110.16, prompting some position squaring. The pair rallied to two-month highs over 110.45 from near 109.90 after the Fed’s dot plot projected potential for rate hikes earlier than previous forecasts.

USD-CAD was a touch higher after the stronger Canadian CPI data, ticking over 1.2180 from near 1.2175. As with the other major currencies, that momentum was short-lived, with the USD-CAD rising from 1.2170 before the FOMC statement to a one-month high of 1.2275 after the statement.

FOREX: Dollar Jumps after Fed Pulls Interest Rate Hikes into 2023

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