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US Dollar, Yields Pivot Lower Following the FOMC Announcement

US Dollar, Yields Pivot Lower Following the FOMC Announcement

Rich Dvorak, Analyst

US DOLLAR, TREASURY YIELDS REACT TO FOMC RATE DECISION, UPDATED DOT PLOT

  • US Dollar losing ground as Treasury yields snap lower following the FOMC rate decision
  • Fed officials upgraded their forecasts for US GDP growth and inflation, dot plot little changed
  • Check out our Live Data Coverage of the March 2021 Fed meeting hosted by DailyFX Senior Strategist Christopher Vecchio, CFA!
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The US Dollar is moving broadly lower with Treasury yields as traders digest the latest update from the Federal Reserve just crossing market wires. FOMC officials decided to leave the target Fed funds rate range unchanged at 0.00-0.25% as widely expected. The Fed announcement echoed plans to maintain its current pace of asset purchases (i.e. QE) at $120-billion per month, and also reiterated that monetary policy will remain accommodative until its long-term inflation and employment objectives are reached.

US DOLLAR PRICE CHART WITH TEN-YEAR TREASURY YIELD OVERLAID: 15-MINUTE TIME FRAME (16 MAR TO 17 MAR 2021)

US Dollar Index Price Chart with Ten Year Treasury Yield Overlaid

Chart by @RichDvorakFX created using TradingView

Interestingly, the latest Federal Reserve statement included a shift in language that noted how indicators of economic activity have picked up. Though looking at the latest dot plot projections from FOMC officials, no rate hikes are seen through 2023 in light of stubbornly subdued inflation. This disappointed US Dollar bulls and sent the broader DXY Index snapping sharply lower alongside softer Treasury yields. Gold price action popped higher, as did the Nasdaq, following a weaker US Dollar and softer Treasury yields. The ten-year Treasury yield has pulled back about 6-basis points from session highs, for example, and currently hovers around 1.63% at the time of writing.

FEDERAL RESERVE ECONOMIC PROJECTIONS – MARCH 2021

Federal Reserve Chart of FOMC Updated Economic Projections Dot Plot March 2021

Chart Source: Federal Reserve

This seems largely in line with recent commentary from Fed Chair Powell outlined during his speech late last month where he said the central bank is not concerned about financial conditions tightening despite surging Treasury yields. Powell added that bond yields are just one of several metrics tracked and used to gauge broader financial conditions.

To that end, credit spreads remain tight, and judging by the National Financial Conditions Index published weekly by the Chicago Fed, there seems to be little evidence pointing to tighter financial conditions. Furthermore, several FOMC officials have welcomed the rise in sovereign bond yields seeing that it reflects better economic outlook for the US economy. Keeping the target Fed Funds rate low looks to help boost Fed credibility given its new pursuit of average inflation targeting (AIT).

FED CHAIR POWELL PRESS CONFERENCE HIGHLIGHTS

  • The Fed is strongly committed to using its full range of tools to support the economy for as long as it takes; Will be patiently accommodative until our job is done
  • Stronger economic outlook follows progress made with the covid vaccine rollout and latest fiscal stimulus bill; US unemployment rate remains elevated while labor force participation is still below pre-pandemic levels
  • Fiscal stimulus will help us avoid economic scarring overall and also expedite the return to full employment
  • Majority of the FOMC is not showing a rate increase during the forecast period through 2023
  • Not yet time to start talking about tapering, we are patiently waiting for ‘actual’ further substantial progress toward goals; Will give as much advance notice as possible before tapering monetary policy
  • Don’t want to focus on timing of next possible rate hike; Benchmark rates were at 0.00% for seven years without financial excesses in the wake of the last crisis
  • We want to get inflation moderately above 2.0% for some time; Inflation will move up over the next few months but one-time price increases will have a transient impact overall
  • Asset purchases are currently appropriate across the yield curve
  • Asset values by some measures are elevated; Household and business debt levels do not appear to be troubling
  • An announcement on supplementary leverage ratios (SLRs) will be made in the coming days; Decision on any restrictions on bank capital distributions remains a couple weeks away
  • Very strong US demand will ultimately support global activity over time; notes US and Europe are seeing divergent recoveries

-- Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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