Forex today: dollar tumbles on FOMC less hawkish than expected

The forex space today was quite a display with plenty going on. The dollar is weak and likely to remain so over the coming days. Traders sold out of long positions on a number of points.

Firstly, the Atlanta Fed's revisions and downgrades to Q1 GDP once again have driven scepticism into the progress of the US economy where productivity is weak and wages are still low. Their outlook for Q1 GDP is now printing below 1% at 0.9%. Inflation remains at a steady 1.7% and the Fed hikes rates on the back of their bullish outlooks for employment and concerns that inflation is running towards their target of 2%. However, the market is looking ahead and the statement nor the dot plot offered anything significantly hawkish. The outcome was bullish for stocks while yields and the dollar dropped. 

The benchmark US 10yr treasury yield fell to 2.50% while the 2yr yields dropped back from 1.38% to 1.30%. In respect to the Fed fund futures, they are are only pricing another rate hike to occur in September, set back from August. The US dollar index is now down 1.0% at time of writing while EUR/USD rallied through 1.0715 in response to the Fed. There was follow through when the Dutch polls started coming though. The Liberal party that will win 31 seats according to the first exit poll and the euro rallied to session highs of 1.0740. Sterling challenged bears at 1.2300 while USD/JPY dropped from 114.60 to 113.35. The antipodeans rallied with the Aussie up to the 0.77 handle while the Kiwi made a high of 0.7041

A detailed response to the Fed: watch for more dollar weakness - Westpac

Day ahead:

Analysts at Westpac offered the key data ahead"

"NZ: Q4 GDP is expected to moderate, partly driven by a drop in dairy and meat processing that quarter, and partly as payback for a surprisingly high Q3. The median expectation among analysts is 0.7% qoq (Westpac at 0.5%) and 3.2% yoy, compared to 3.5% yoy in the Sep quarter.

Australia: Feb labour force is expected by the analyst market to post a 16k gain in employment which will hold unemployment at 5.7% if participation holds steady. Westpac’s slightly higher 20k forecast lifts the annual pace to 1.2%yr. Business surveys continued to strengthen in early 2017, and our Job Index is now pointing to employment growth of around 2¾%yr by Q3. The 13.7k Jan jump in employment was reported with a 5.8k decline in the labour force, which is why the unemployment rate fell to 5.7%. As the working age population grew 34k, the reported participation rate fell 0.1ppt.

Japan: The Bank of Japan policy decision is expected to be unchanged. We will be looking for greater clarity in the statement regarding the monthly asset purchase rate in relation to ‘yield curve control’ policy.

Eurozone: The Dutch election outcome will be made clear. A divided electorate is likely to result in negotiations to set up a coalition of around 5 parties. The incumbent Prime Minister is strongly against a coalition containing populist Wilders’ PVV party.

UK: The Bank of England policy decision is expected to be on hold. We don’t expect a significant change in the neutral bias but some more hawkish comments may creep in due to resilience in activity, as well as inflation pushing higher, particularly for imports like food and fuel. Nevertheless, the longer term downside risks for activity are likely to remain front and centre."

Main topics in U.S. session

• Fed's policy-setting committee did not flag any plan to accelerate the pace of monetary tightening - RTRS
• Fed's projections showed the economy growing by 2.1 percent in 2017
• FOMC's decisions regarding monetary policy implementation
• Fed's Yellen: It's uncertain just how much sentiment impacts spending decisions
• Fed's Yellen: Headwinds from financial crisis remain
• Fed's Yellen: Basis for rate hike is progress of economy
• Fed's Yellen: We want confidence in economy before shrinking balance sheet
• Fed's Yellen: Fed funds rate does not need to rise much to get to neutral
• Fed's Yellen: Core inflation has been little changed in recent months
• Fed's Yellen: Policy change does not represent reassessment of economic outlook
• Dutch election: Exit poll results show Labor Party is headed for its worst result
• US dollar index tumbles despite Fed rate hike
• Gold leaps to $1220 as DXY tumbles more than 1%
• US: The Consumer Price Index increased 0.1% in February on a seasonally adjusted basis
• US: Retail sales were up 0.1% from January 2017, and up 5.7% from last year
• US Debt Ceiling: Borrowing limit re-imposed on 16 March - HSBC

US debt ceiling next big thing for markets?