5 reasons for USD rally on the Fed decision

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The third taper of bond buys was certainly expected and priced in. So was the removal of the 6.5% threshold in the Fed’s forward guidance. So, why did the US dollar enjoy a rally enjoy a strong rally that sent USD/CAD to multi year highs and EUR/USD below key support?

Here are 5 hawkish events that stirred the rally:

  1. Lower unemployment forecasts: the big difference in the accompanying economic forecasts lies in the lowering of the unemployment forecasts: For 2014: 6.1-6.3% instead of 6.3% for 6.6%. And for 2015: 5.6-5.9% instead of 5.8-6.1%. Maximum employment is one of the Fed’s two mandates.
  2. No change in inflation forecasts: for the Fed’s second mandate, core inflation, no excitements were recorded. 2014 is still expected to see 1.4 to 1.6%. 2015 is expected to have a core PCE inflation rate of 1.7 to 2% instead of 1.6 to 2% beforehand. This is very stable and quite healthy.
  3. A dovish dissenter: During many of the Fed’s meetings, we had one hawkish dissenter. When we have a dovish one, this is a hawkish sign.Narayana Kocherlakota dissented to the dovish side, saying that the commitment regarding inflation is not strict enough.
  4. Blaming the weather: The FOMC statement’s opening paragraph acknowledged the slower growth but immediately mentions the weather. This shows that the Fed is not too worried about the lower growth and probably sees weather as a bump and not as a game changer.
  5. Rate hike hint: This may have been unintended, but it is critical. When asked about what “considerable time” means in relation to the period between ending QE and starting to raise rates, Yellen answered 6 months. QE is expected to end in around 7 months, at the October 29th meeting. 6 months later is April 2015. Though far from explicit, here we finally have less than vague expectations for a rate hike in the US, after long years of near zero rates.

Needless to say, the next moves depend on the data, but the Fed is certainly leaning to the hawkish side.

What do you think? Is the rally over or could we see more?

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About Author

Yohay Elam – Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I’ve accumulated. After taking a short course about forex. Like many forex traders, I’ve earned the significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I’ve worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.

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