The Federal Reserve removed the “patience” wording but more than balanced this with dovish wording, providing the dollar many reasons to fall.
And how exactly does the Fed see the greenback? The team at Bank of America Merrill Lynch explains:
Here is their view, courtesy of eFXnews:
The following is Bank of America Merrill Lynch’s reaction to today’s FOMC statement and Fed Yellen’s press conference.
As expected, the FOMC removed “patient” from its forward guidance, giving itself flexibility to hike in June or later, depending how the data evolve. However, the significant reduction in the dot plot over time convinced markets that the Fed would likely start hiking rates later than June “” and, as a result, stocks and bonds rallied sharply, while the US dollar sold off. We got some of the capitulation on the inflation outlook that we were expecting this year; overall the forecast changes and Yellen’s comments leave us comfortable with our September liftoff call.
FX: Dollar on their mind. The FOMC statement and Chair Yellen’s press conference mentioned a number of near-term factors that we expect to weigh on the USD.
We doubt it’s a binding constraint for now, as Chair Yellen downplayed these impacts during the press conference: she characterized USD strength as a sign of US economic strength, and expects consumption strength to offset net export weakness. But, taken together with the dovish tilt of the projections, this added to the broad USD selloff post-meeting. Greater uncertainty about the Fed’s reaction function in the absence of forward guidance puts that much more focus on data for the USD.
Risk-sensitive currencies will benefit as the first Fed hike gets pushed back from June. But longer-term policy divergence will continue to be a USD-positive factor with only the BoE in G10 likely to hike rates this year. Therefore, USD moves will depend more on data going forward, with the Fed squarely in a data-dependent mode.
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