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US Dollar Tumbles to Key Support as FOMC Leaves Door Open for Action

US Dollar Tumbles to Key Support as FOMC Leaves Door Open for Action

Christopher Vecchio, CFA, Senior Strategist

The Federal Reserve’s policy meeting on March 13 was decisively neutral. Indeed, with the statement accompanying the decision suggesting that sentiment among policymakers was broadly neutral, the minutes from the meeting highlighted the recent ‘hawkish’ shift among voting members. Today’s rate decision didn’t have that same feel the March meeting did, and certainly, the reaction by markets was relatively muted as investors interpreted Chairman Ben Bernanke’s message as broadly neutral, if not potentially dovish.

There are two main takeaways from today’s rate decision: the Federal Reserve’s revised economic forecasts; and the Federal Open Market Committee’s seemingly never ending commitment to keeping the liquidity spigot open.

The projections released by the Fed showed that officials expect the economy to continue to expand at a moderate pace for the near-future. The 2012 growth expectation was upwardly revised to 2.4 to 2.9 percent from the 2.2 to 2.7 percent range in January, while the 2013 growth forecast was slightly reduced to 2.7 to 3.1 percent from the 2.8 to 3.2 percent range. On the job front, the unemployment rate forecast was shifted down from January’s 8.2 to 8.5 percent range to the 7.8 to 8.0 percent range. Similarly, eleven of the seventeen Fed members see no rate increase before 2014 while seven see the benchmark rate below 1 percent in 2013 and five see the key rate at 1 percent or higher in 2014.

USDJPY 1-minute Chart: April 25, 2012

US_Dollar_Tumbles_to_Key_Support_as_FOMC_Leaves_Door_Open_for_Action_body_Picture_1.png, US Dollar Tumbles to Key Support as FOMC Leaves Door Open for Action

Charts Created using Marketscope – Prepared by Christopher Vecchio

While market participants initially took this news as bullish for the US Dollar – in theory a more hawkish Fed should cull quantitative easing hopes – Chairman Bernanke’s press conference derailed the US Dollar rally and instead sent the USDJPY dropping from its daily highs – a clear sign that market participants believe that Chairman Bernanke’s commentary was a strong indication of future easing. The chairman said that “We remain entirely prepared to take additional balance sheet actions if necessary to achieve our objectives. So those tools remain very much on the table and we would not hesitate to use them should the economy require that additional support.”

Chairman Bernanke went on to note that the FOMC plans to continue with the highly accommodative policy as some of headwinds remained, such as a “depressed” housing sector, the financial crisis in Europe, and credit tightness. He also reiterated that headline inflation is close to or below 2 percent target, and a recent increase in prices was caused by temporary shock in oil sector. “There is no presumption even in our econometric models that need inflation well above target in order to make progress in unemployment”, the chairman said.

Though continuing to endorse the Fed’s 2014 interest rate pledge, he expressed his hope of a rate rise at some point in the near-future as higher rates would indicate a strong recovery. Chairman Bernanke also emphasized that Fed funds guidance is conditional on economic condition. If economic data appears stronger, the Fed will adjust guidance accordingly, he noted.

--- Written by Christopher Vecchio, Currency Analyst and Trang Nguyen, DailyFX Research

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, send an e-mail with subject line "Distribution List" to cvecchio@dailyfx.com

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