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Fed officials only project 2 Fed hikes this year, down from 4; commodity currencies race higher, NZD/USD up 1.6%; UK Budget downgrades economic forecasts

Currencies
Fed officials only project 2 Fed hikes this year, down from 4; commodity currencies race higher, NZD/USD up 1.6%; UK Budget downgrades economic forecasts

By Jason Wong

There was only one thing on everyone’s mind overnight, and that was the FOMC meeting. 

With little chance of a hike priced in (a 4% probability), the focus was on the tone of the Statement and Chair Yellen’s press conference.

Trading volumes were very light as the meeting was awaited, with only small market movements across currencies, equity markets and bonds.

The US dollar was well-bid in the lead-up to the FOMC announcement at 7am local time. 

US data showed higher than expected core CPI inflation (again), with the annual increase moving up to 2.3%, the strongest in four years.  Housing data were mixed – stronger starts but weaker permits – while industrial production fell by more than expected in February following the strong gain in January.

Pre-FOMC the DXY index was up 0.25%, with the USD strong against almost all the major currencies. CAD was the exception, with a slightly stronger currency –  oil rebounded around 3%, after falling the previous day on talk of Iran not joining in with the proposed production freeze.

Post the FOMC the USD fell by about 0.9%. While rates were left unchanged, the market latched onto the phrase that “global economic and financial developments continue to pose risks”. 

With this backdrop, Fed officials now expect to only raise rates by 0.5% this year, down from 1% previously. Many expected the Fed to only pare back one of the previously flagged rate hikes for this year.  Interestingly, there was one dissenter, with Esther George voting to raise rates at this meeting, but the market ignored this fact.

So a more dovish than expected Fed has seen the USD fall across the board.

The commodity currencies have seen the biggest gains, with the NZD up 1.6% to 0.6713, the CAD up 1.4% and AUD up 1.1%. These figures are have been rapidly moving up as I write and the press conference has just begun.

After being up 0.25% pre-FOMC, DXY is now down 0.7%.

Both GBP and the Yen are stronger against the USD.The UK Budget showed downgraded economic forecasts and weaker fiscal metrics.  Both tax cuts spending cuts were pledged amidst a promise to return to budget surplus by 2019/2020.  The BoJ’s Kuroda told Parliament that the policy rate could theoretically fall as low as minus 0.5%.

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