Last night’s announcement of the meeting of the Federal Open Market Committee (FOMC) took markets by surprise. The dovish tilt from the Fed has resulted in the US dollar coming under significant pressure. The US yield curve has bull falttened, there has been a strong run on key forex pairs and the gold price rebounding too. It has been a meeting that has had a real impact on the outlook across the markets. The fallout from the surprise of the FOMC meeting means that several key technical levels are either under threat or have already been broken.
It was an FOMC meeting that was filled with caution. Perhaps this should be little surprise with Janet Yellen as the Fed chair, a committee member who has long stood on the dovish side of the argument. In her press conference, Yellen all but confirmed that there wold be a rate hike by December, if not earlier in September (the Fed will look ipon the need to make such as important first step as it make a renewed set of forecasts and also has a press conference scheduled in order to fully explain the decision).
However Yellen also noted that further improvements needed to be seen in the labor market and when the committee was reasonably confident that inflation was on the path towards 2%. More needed to be done. This cautious stance was exaccebated by a cut to the GDP projection for 2015 and a dovish slide in the dot plots for 2016 and 2017 (which would have been the cause behind the flattening of the US Treasury yield curve). For me this is the major take away from the FOMC meeting. Yellen was emphasising that focus should be on the speed of rate hikes rather than the timing of the first move. The dot plots suggested that the Fed is in intent on not hiking rates too quickly in its path back towards normalisation. Furthermore, the fact that the number of committee members who are expecting 2 rate hikes in 2015 has dropped from 14 to 10, whilst there are still 2 members who think there will be no rate hikes in 2015. This leads me to expect that there will be just the one rate hike in 2015, with December the base case and September still a possibility.
There has been a significant impact on the US dollar in response to this surprisingly dovish outlook for the path of rate hikes for the Fed. With the dollar bulls under pressure this has meant that across the forex major pairs there are some significant levels either being breached or ready to be tested.
The pairs that are already in the process of breaching key levels:
Other pairs are ready for a test of key levels:
(N.B. The only major that the dollar is not getting panned by is the Kiwi, which has been under pressure from a dovish outlook from its own central bank, but also by last night’s GDP disappointment too.)