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Dollar Temporarily Higher as Inflation Higher on the Agenda

The Fed is cautiously more optimistic about the US economy and dedicated a bigger portion of its statement to the rising inflation. These slightly more hawkish words help the dollar. Analysis of the FOMC Statement.

The FOMC Statement was very similar to the last one. Some of the words were copied and pasted. But these lines from the statement are of importance (emphasis mine):

Commodity prices have risen significantly since the summer, and concerns about global supplies of crude oil have contributed to a sharp run-up in oil prices in recent weeks.

The recent increases in the prices of energy and other commodities are currently putting upward pressure on inflation. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations.

While the Federal Reserve looks at these rises in oil and commodity prices as “transitory” or “imported” if you wish, inflation receives a higher level of attention here. These lines didn’t appear beforehand, and they show that the FOMC does not totally ignore them.

This doesn’t mean we’re going to see a rate hike anytime soon. The wording about the rates didn’t change. What it may hint, is that no extension of QE2 or QE3 is currently on the agenda.

Forex Reaction

EUR/USD fell from 1.3980 to 1.3960. GBP/USD made a small fall and rose back up. Both the Euro-zone and Britain await a rate hike. USD/JPY experiences very choppy trading after the horrific earthquake.

The reaction is relatively mild, but we should watch closely how the wording about inflation evolves in the statements of Ben Bernanke and other Fed officials.

Further reading about the rate hike in Europe: Will the Euro Eventually Suffer from the Rate Hike?

Yohay Elam

Yohay Elam

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 a 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.