USD weakens after FOMC decision and press conference
Last night's FOMC rate decision delivered what was widely expected - unchanged rates, with the target range staying at 1.50-1.75% - and a wait and see policy going forward. This was pretty much priced in, and the announcement of the rate call and statement gleaned limited reaction from the market. However, once the dot plot was scrutinised, we saw some modest USD weakening, as some policymakers marked down their mid-rate expectations over the forecast period through to 2022. Long-run expectations were also marginally lower, but not enough to make a significant impact on the greenback. The statement was also little changed from the prior meeting, where they saw current policy and rates at appropriate levels relative to economic activity.
However, the volatility came when Fed chair Powell started his press conference, though he started off saying that the US economic outlook remains favourable as was stated in the Fed statement. He outlined how he and the rest of the Fed expected moderate growth to continue, noting a rise in incomes and consumer confidence. He maintained that monetary policy is not on a pre-determined course and will be considered in line with incoming data.
The communique then turned to inflation, which at sub 2.0% was seen to be potentially unhealthy. Adding to this, the Fed chair then said that it would require a significant and persistent rise in inflation in order to prompt the Fed to raise rates again, and this saw the USD take a fresh hit as CPI levels have been particularly sluggish, especially over the past year when the US economy has been performing well. That said, headline CPI came in at 2.1% as per yesterday's figures, rising by 0.3% in November (vs 0.2% expected) so watch this space!
Going forward, we have to watch the incoming data - as stated by Fed chair Powell - so markets will be cautious on the USD from this point on.