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US Dollar Drops, Stocks Tick Higher Following Fed Rate Decision

US Dollar Drops, Stocks Tick Higher Following Fed Rate Decision

Peter Hanks, Strategist

US Dollar & Fed Rate Decision:

  • The Federal Open Market Committee announced it would not change the Federal Funds rate, fulfilling market expectations
  • Given the action at recent rate decisions, December’s meeting offered the Fed an opportunity to monitor data under the new policy landscape
  • Critically, the Fed signaled rates will be on hold through 2020 while a rate hike would require persistent and significant inflationary pressures
  • US Dollar Outlook Bullish Ahead of FOMC, Retail Sales, CPI

US Dollar Drops, Stocks Tick Higher Following Fed Rate Decision

The US Dollar spiked before quickly diving lower following the Fed’s December rate decision, at which the central bank announced it would maintain the current interest rate range of 1.50% to 1.75%. To gauge the impact of recent Fed rate decisions, central bank officials announced they would continue to monitor the effect of monetary policy on the economy and removed reference to “uncertainties” in the outlook statement.

Further, the meeting revealed most officials see the Federal Funds rate on hold throughout 2020 and Chairman Powell personally suggested the central bank would want to see a persistent and significant rise in inflation before raising rates. The remark on the case for future rate hikes saw the US Dollar drop further as investors took the comments as a dovish development despite similar commentary at the Fed’s prior meeting.

Fed dot plot

Source: Federal Reserve and Michael Boutros

Alongside their decision to maintain the current Federal Funds rate, the central bank released their updated Summary of Economic Projections (SEPs). Notable changes from the September forecast for 2020 include the unemployment rate slipping to 3.5% from 3.7% and the median Federal Funds rate dropping to 1.6% from 1.9%.

Fed SEP

Source: Federal Reserve

On the matter of the standing repurchase facility, Chairman Powell noted year-end pressures in the market, but suggested such pressures were manageable. In turn, the Chairman conceded the topic is an issue that will take time to evaluate.

US Dollar Price Chart (DXY): 5 - Minute Time Frame (December 2019) (Chart 1)

US dollar price chart, DXY after Fed meeting

With that in mind, the December meeting looks to have compounded the Fed’s previous position and has effectively placed the central bank in a holding pattern as economic data continues to trickle in. The relatively uneventful decision saw the US Dollar fluctuate before diving lower to trade around 96.60 which could suggest Chairman Powell’s commentary was more dovish than the market had anticipated – despite only minor changes in language.

Dow Jones Price Chart: 1 - Minute Time Frame (December 2019) (Chart 2)

dow jones price chart after fed meeting

In the case of the Dow Jones, the meeting’s passing has removed a key risk for the index as it attempts to rebound to record levels – a prospect that could be more likely with the Fed’s dovish policy path. Looking ahead, the Industrial Average’s focus will now likely shift to the December 15 tariff deadline. In the meantime, follow @PeterHanksFX and @DailyFX Team Live on Twitter for news and analysis.

--Written by Peter Hanks, Junior Analyst for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX

Read more:Stock Market Crashes: Current Climate Compared to Prior Conditions

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