The Federal Reserve held interest rates and asset purchases steady in its latest monetary policy update. Fed chair Powell suggests the FOMC remains patient but there is cautious optimism of the US economic recovery. This was much anticipated by the market and the renewed US dollar (USD) negative trend remains on track, for now. This is shown across major markets. 

  • FOMC statement language tweak reflects growing confidence in the economic outlook.

  • As expected, Fed chair Powell looks to play down the taper prospects. 

  • Yields initially uncertain but now pulling higher. USD initially weakened and the corrective trend remains, but will this continue? 

  • EUR/USD is still eyeing 1.22 and Gold eyeing $1800 but momentum could be slowing

FOMC statement reflects growing confidence

The language in the FOMC statement was changed slightly to reflect the improvement that is taking hold in the US economy. The changes are shown below.

FOMC statement

The main takeaways were: 

  • “Economic activity and employment have strengthened” – Not surprising, with Q1 Advance GDP expected to be c. +6.5% today, and employment potentially set to add around +1m jobs in next week’s Non-farm Payrolls for April.

  • “Inflation has risen, largely reflecting transitory factors” – this has been noted previously by Fed chair Powell.

  • Removing the word “considerable” when talking about the risks to the economy from the pandemic.

 All of these changes reflect the growing confidence that the FOMC has in the economic recovery. However, there is still much to be seen before tightening.

Powell tries to rein in expectations of the taper

Despite this, Fed chair Powell continues to hold the reins tight on expectations of tightening monetary policy too soon. From his press conference a couple of his comments stood out:

  • “it is not time yet” to talk about tapering the $120bn asset purchases

  • “not close to” the substantial progress towards employment and price stability goals

However, progress is being made and the statement shows increasing signs of a shift in a policy stance that is still expected later this year.

Yields moving higher again could begin to support USD

The initial market reaction was interesting. Bond yields initially fell (perhaps expecting a more upbeat assessment). USD also weakened. However, as the dust is settling this morning, the US 10 year yield is moving higher again. It seems that an important low could now be forming at 1.528.

Chart/US 10 year yield

This has implications for the renewed USD sell-off as the positive correlation between the 10yr yield and USD remains positive (even if it has fallen slightly recently).

Chart/ USD remains positive

Whilst the trend lower on USD is still in place, an intraday rebound on Dollar Index has been seen (as the US 10 year yield has moved higher). A move above 91.13 (yesterday’s high) would be a near term shift in sentiment to test 91.25/91.60 key resistance.

Chart/Dollar Index

Can EUR/USD get above 1.22 and Gold get above $1800?

A falling USD is a key factor in driving EUR/USD higher in recent weeks. The uptrend channel is intact and yesterday’s breakout has again re-opened the January/February resistance at 1.2190/1.2240. For now, we remain bullish on this move, but if Treasury yields continue to rise, then we could see more of a ranging outlook forming on EUR/USD.

Chart/ EUR/USD

For Gold, the last couple of weeks have been a slog. Breaking out above $1755/$1765 implied $1845, but the market has struggled under $1800. If USD can muster a near term recovery, this will make it even harder for gold to move above the $1797 reaction high. A ranging phase may also be the result for Gold.