As expected there was no rate change following the FOMC meeting, but that was never what anyone was looking out for, it was always about the statement. It was an interesting statement, The Federal Reserve has retreated from its more hawkish view on the US economy somewhat, and is now only forecasting two hikes this year. For me, the really interesting thing is the fact that core CPI in the United States has now risen to its highest level in 4 years and with labour markets continuing to tighten the statement was actually more dovish than I and many others expected. So much so that the dollar weakened significantly in the aftermath and stocks and bonds rallied. You have to ask yourself, given the markets recovery rally from the start of the year that we’ve seen over the last month, and the fact that the macro data has been supportive of the ‘US is recovering robustly’ case, why be so cautious on the outlook? I can only conclude that there is a genuine concern over the state of the global economy and the Fed has elected to take a wait and see approach. Whatever the reason is, the market looks to be calling the Federal Reserve’s bluff. Despite the fact the FOMC moved closer to the market’s estimation of future US rate hikes the market became even more dovish on future prospects post the announcement.
What does this mean for the dollar? Well… in my view, when the dust settles it still comes down to relative growth prospects and interest rate differentials. The dollar remains the only game in town as far as I can see. As financial conditions continue to ease in the wake of a continuing equity market rally, the Federal Reserve will be given the room to re-assess again. Ask yourself this…where else are you going to deposit your cash? JPY… get ready to pay for the privilege as negative rates erode your capital! EUR… same. GBP… with Brexit hanging over your head? No.. the dollar is it right now. I continue to view these dollar selloffs as the liquidations of short term traders caught offside by negative data. The bullish case for the dollar seems largely intact, if only because the greenback retains the best chance of preserving your capital. That said I am keeping a close eye on certain key levels like 1.44.37 in GBP/USD. Above that and I would have to re-assess the status of the dollar trend.
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