Danske Research discusses its reaction to today’s FOMC January policy statement.
“As widely expected, at the meeting the Fed did not raise its target range, which remains at 2.25-2.50%. More interesting was the statement filled with changes, which reflects what we heard in speeches ahead of the meeting. The Fed no longer says that it “judges some further gradual increases” are needed, and the sentence on the balance of risk was also removed. Instead, the Fed now says it can afford to be “patient” for now (a word that has appeared in many speeches ahead of the meeting) “in light of global economic and financial developments and muted inflation pressure”. Fed Chair Powell said during his Q&A that higher inflation was “big part” of what he needed to see before moving again. As noted in the FOMC minutes from the December meeting, the Fed now also recognises that market-based inflation expectations have fallen. All of the above is dovish but not a big surprise given the dovish signals in recent speeches,” Danske notes.
“The market welcomed the dovish signals, sending both EUR/USD and S&P500 higher. The message cements the sense of a ‘Fed on hold’, which is key to the FX market as this means the USD carry momentum is fading, notwithstanding a few more hikes down the road. The USD is vulnerable to such a shift as positioning likely remains stretched on USD longs,” Danske adds.