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Global markets around the world are still reeling, digesting yesterday’s dovish Fed statement and positioning for the second quarter. The big dollar is on the defensive, falling hard along with treasury yields as rate hike projections were basically cut in half. While the FOMC decided to keep the headline rate at 0.50%, the committee presented a more cautious outlook, specifically citing external factors. More analysis below.

Overnight, better EU CPI data further supported the euro, pushing the single currency to its level versus the dollar since February 12th. European equities were all lower after a more mixed Asian session. Perhaps the Fed’s worries over international factors weighing on US growth caused for some worry? Data was sparse during the Asian session with commentary from Chinese and Australian policymakers guiding sentiment. China’s Commerce Ministry said it will ease restrictions on foreign investment to attract more foreign direct investment in 2016. The RBA’s Debelle was commenting on concerns over the Aussie’s recent rise and the committee’s desire for a weaker currency. As oil prices spiked to $41 overnight, the Australian dollar touched its best level since early July. Finally, the Bank of England concluded its latest policy meeting this morning, with no change to the main rate or QE levels. Policymakers said sterling was definitely hit by uncertainty concerning the “Brexit” referendum and this vote could delay some spending initiatives and other policy measures. The committee voted 9-0 to keep rates at 0.50%.

Concerning yesterday’s FOMC decision, it was a pretty surprising afternoon. As previously reported, Chairman Yellen and her colleagues decided to keep rates unchanged at 0.50% and presented a much more cautious outlook. The big dollar was sold across the board, losing ground versus most major currencies, notably the Canadian dollar and other commodity currencies. “The committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen,” the FOMC said. “However, global economic and financial developments continue to pose risks.” The Fed maintained their projections on how soon inflation will return to its 2% target, but lowered this year’s forecast from 1.6% to 1.2%.

The Fed also lowered their headline rate forecasts, bringing down the median rate for 2017 from 2.40% to 1.90%. The big takeaway from yesterday’s statement was the reference to external factors affecting domestic growth. It appears the Federal Reserve made decisions yesterday more as the world’s central bank – opposed to America’s central bank. It has been an unbalanced start to this year, but a recent bounce in equities and commodities actually had some in the Street thinking we could see a rate hike yesterday. It is clear the Fed had other ideas.

This morning, the Canadian dollar continues to outperform, one of the true winners from yesterday’s FOMC surprise. Commodity currencies have all outdone the majors, as energy prices soar under the weaker dollar. The USD/CAD rate took out key psychological levels and is currently below the 200-day moving average, an important level to watch on tomorrow’s weekly close. Strong employment data in the form of US weekly jobless claims was unable to boost the greenback and with very little US data remaining through tomorrow, expect Janet’s external factors to guide us in the weekend. Canadian inflation and retail sales are on the docket tomorrow, the last bit of data ahead of next week’s important budget meeting. Good luck and have a great Thursday.

Further reading:

EUR/USD: Trading the UoM Consumer Sentiment

‘Marching In Place’: What’s Next For The USD Post-FOMC? – BofA Merrill