Fed Monetary policy statement mildly hawkish

Foenix Partners

Foenix Partners

Wednesday proved a quiet day in the markets with little occurring before the focal point of the Fed Monetary policy statement which provided the market with an update on interest rates, digested by many as mildly hawkish with the greenback making small gains. European trade was slow with a sole print of German gfk consumer confidence in early morning trade coming out stronger than forecast at 9.3 (9.1 expected). After market turbulence in Europe in recent weeks, focus shifted very much to the US with the Fed policy statement and interest rate decision yesterday evening. Interest rates, as expected, stayed constant, and Yellen explained the key aspects of the FOMC meeting from December; the Fed noted that economic activity has been expanding at a solid pace overall, with labour market conditions improving further and despite inflation declining below the Fed’s longer term objective, this was due to the decline in energy prices and wasn’t a concern, with forecasts remaining stable. Perhaps the key part of the whole statement came in the wording around rates, where the Fed repeated it will be ‘patient in beginning to normalise’ rates, although it did drop the reference that rates will be held at current levels ‘for a considerable time’, which many traders had taken to imply a period of six months. Another key word used was ‘patience’, and indications were given that the hike could come as early as June. These phrases have been taken as hawkish by the market, largely in the context of worrying global outlook with the eurozone, putting the US firmly ahead in monetary policy progress across the world. However, this wording must be taken lightly as most investors have been expecting a US rate rise this year for a long time, and despite slight wording changes suggesting a hawkish tone, the Fed is not making firm commitments and hasn’t changed the outlook much at all.

Price action was lacklustre throughout the day, with many waiting for the Fed statement in early evening. The reaction to the Fed itself was moderately bullish for the dollar, with EURUSD tailing off down to below 1.1200 again and GBPUSD dropped below 1.5200 to settle back slightly above 1.5100 in what is now familiar territory. The day ahead sees German unemployment change and CPI this morning, along with eurozone consumer confidence, then later in the US we have initial jobless claims and pending home sales to round things off.

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