The U.S. dollar strengthened on Wednesday after the Federal Reserve decided to keep interest rates unchanged. However, the central bank also revealed a more hawkish outlook, indicating a potential rate hike by year-end.
The U.S. dollar index, which measures the currency against a basket of six peers, advanced by 0.09 percent to reach 105.21. It recovered from an earlier session low of 104.66.
Fed policymakers anticipate the central bank’s overnight interest rate to peak between 5.50 and 5.75 percent, mirroring their June projections. This number would be a slight increase from the current range of 5.25 to 5.50 percent.
However, the Fed’s latest quarterly projections also indicate that rates will decrease by only 0.5 percentage points in 2024. This decrease would contrast the one percentage point of cuts expected at the June meeting.
Karl Schamotta, chief market strategist at Corpay, described the Fed’s policy decision as a “skip” instead of a “pause.”
“With the economy performing better than expected and inflation pressures remaining persistent, Fed officials chose to maintain a hawkishly data-contingent bias in this afternoon’s statement and dot plot,” Schamotta said, as quoted by Reuters.
Meanwhile, two-year Treasury yields reached their highest levels in 17 years on Wednesday. These yields are particularly sensitive to interest rates, and this surge followed the Federal Reserve’s decision.
Fed Chair Jerome Powell expressed optimism that the Fed’s aggressive rate hikes are unlikely to push the economy into a downturn. Nevertheless, he acknowledged that certain factors may be beyond the central bank’s control.
Gennadiy Goldberg, an interest rate strategist at TD Securities, noted that the Fed’s intention appears to be sending “as hawkish a signal as it possibly can.”
Dollar’s ‘golden cross’
The dollar index’s recent strong performance positions the currency into forming a bullish technical trading chart pattern known as a “golden cross.” This indicates an optimistic short-term outlook for the currency, as per a BofA Global Research report.
The pound displayed volatility, dropping 0.28 percent to $1.2357. This decline occurred after data revealed an unexpected drop in British annual consumer price inflation to 6.7 percent in August. The drop happened just ahead of the anticipated rate increase by the Bank of England.
Dominic Bunning, head of European FX Research at HSBC, proposed that the softness in core and services inflation should offer some reassurance. This softening is expected to limit the Bank of England (BoE) to a 25-basis point hike on Thursday, effectively signaling the apex of the current rate-hiking cycle.
Attention remained focused on the yen as U.S. and Japanese authorities made fresh comments about potential intervention. After the Fed’s decision, the yen declined 0.13 percent against the dollar. The Japanese currency traded at 148.05 per dollar on Wednesday.
Masato Kanda, Japan’s top financial diplomat, emphasized the need for close communication regarding currency matters with U.S. and overseas policymakers. He also underscored the importance of maintaining a vigilant stance when monitoring market developments, emphasizing a “high sense of urgency.”
Regarding the possibility of Japan conducting another yen-buying intervention, U.S. Treasury Secretary Janet Yellen indicated that it “depends on the details” of the situation.