Home AUD/USD surges to upper 0.7700s in wake of more dovish than expected FOMC dot-plots
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AUD/USD surges to upper 0.7700s in wake of more dovish than expected FOMC dot-plots

  • AUD/USD has spiked higher amid a dovish reaction to the latest FOMC monetary policy decision.
  • The Fed held  policy setting steady, but its dot-plot appears to have been less hawkish than feared.

AUD/USD has spiked higher amid a dovish reaction to the latest FOMC monetary policy decision, surging from just above the 0.7700 level to close to 0.7775. The US dollar has been slammed against most of its G10 rivals and now sits close to the bottom of the G10 FX performance table on the day. AUD, which had been one of the worst performing G10 currencies, has now jumped into third from top spot, up about 0.3% on the day versus the US dollar. The dovish FOMC event has injected a dose of risk appetite into markets (stocks have surged, anyway) and AUD is clearly benefitting from this disproportionately on account of its risk-sensitive characteristics. Coming up: Fed Chair Jerome Powell will now be speaking to the press and will take questions (he started at 18:30GMT).  

FOMC Recap

As expected, the FOMC decided to leave the Federal Funds target range unchanged at 0.0-0.25%, the Interest On Excess Reserves (IOER) rate at 0.1%, its rate of monthly asset purchases at $120B. Meanwhile, the Fed continues to forecast no rate hikes through 2023 via its dot plot – markets seem to have expected the Fed’s dot plot to forecast a hike in 2023, hence the dovish market reaction. Note that the new dot plot is a little more hawkish than the last edition, however, with seven FOMC members forecasting lift off in 2023 (previously five) and four in 2022 (previously one).

In terms of the monetary policy statement, not that much was changed apart some language about the pace of the recovery (which was tweaked to show the recovery has accelerated) and the removal of a line about oil prices weighing on inflation. The first tweak is of course a reflection of the economic boost from more fiscal stimulus and the latter tweak is a reflection of the fact that oil prices have recovered sharply in the last few months. The Fed maintained it guidance that there will be no interest rate hikes until it has achieved its dual mandate (full employment and inflation moderately and sustainably above 2.0%) and that the pace of QE purchases will not be slowed until significant progress is made towards this mandate.

Finally, the Fed’s new economic projections for 2021 were very bullish; the bank now expects the US economy to grow at a pace of 6.5% in 2021 (previous forecast was for a growth rate of 4.2%), at 3.3% in 2022 and at 2.2% in 2023. Meanwhile, the Fed now sees Core PCE inflation rising to 2.4% in 2021 before moderating back towards 2.0% in 2022 and 2023 and the unemployment rate dropping back to 4.5% by the end of 2021 before falling back to pre-pandemic levels around 3.5% in 2023. Notably on inflation; the majority of Fed members now see inflation risks as tilted to the upside rather than the downside.

So all in all, the Fed was much more optimistic on the outlook for the US economic recovery in the coming years, making sizeable upgrades to its economic projections tweaking the language in the statement to reflect this. A hawkish minority of Fed members clearly see the better outlook as a reason to tighten policy earlier than in current guidance, and these calls for earlier tightening appear to be growing louder as shown by the more hawkish dot plot. But its seems as though markets were fearing something even more hawkish than what the Fed actually delivered, hence the dovish reaction.

 

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