Fed: Dovish forward guidance to add downward pressure to the dollar – MUFG

The US dollar has strengthened following the latest FOMC meeting with the dollar index rising back towards the top of its recent narrow trading range between 92.000 and 94.000. The Federal Reserve has strengthened forward guidance but lacked urgency to meet to new goals, per MUFG Bank.

Key quotes

“The price action is interesting as it suggests some degree of disappointment that the Fed did not go further and announce even more aggressive easing. It is another indication that a lot of the bad news is now priced into the US dollar at the current juncture which has helped it to consolidate at sharply lower levels since the end of July. It keeps us wary of the risk of a short-term correction higher for the US dollar in light of building US dollar short positions and bearish sentiment.”

“The Fed backed up their recent updated policy goals by strengthening their forward guidance. The new goals revealed that the Fed will place more importance on achieving full employment and tolerate a moderate inflation overshoot for some time thereby signalling that policy will remain looser for longer than normal during the economic recovery.”

“While the dovish forward guidance wasn’t sufficient to trigger further US dollar weakness in the near-term, it will continue to place downward pressure on the US dollar in the coming years by helping to anchor nominal yields and encouraging higher inflation expectations and lower real yields during the economic recovery.”

“The Fed still has room as well to loosen policy further by adjusting their QE programme which was left unchanged. There was some disappointment though that the Fed did not commit to do more immediately to help achieve their new policy goals more quickly. The tone of Chair Powell’s comments in the press conference added to that sense of disappointment as well over the Fed’s more passive approach.”