The Federal Reserve made no changes to interest rates, bond-buying will continue while median projections were for zero interest rates until the end of 2022.

The Federal Reserve made no changes to interest rates, bond-buying will continue while median projections were for zero interest rates until the end of 2022. The dollar initially declined sharply before some recovery as Chair Powell dampened talk of yield-curve control and there was no talk of negative interest rates.

The dollar index recovered from 3-month lows with EUR/USD retreating to below 1.1350 from highs at 1.1420. Risk appetite also deteriorated sharply as markets had priced in a strong recovery and adopted a more sober attitude following the Fed rhetoric.

Sterling held firm on Wednesday with GBP/USD peaking above 1.2800, but retreated sharply on Thursday as risk appetite dipped.

French industrial production declined 20.1% in April which was close to consensus expectations. The Euro maintained a firm tone in early trading and pushed higher as the US dollar came under renewed pressure and declined to 3-month lows. EUR/USD pushed to fresh 11-week highs near 1.1390 ahead of the New York open before a slight correction. ECB vice-president de-Guindos stated that the May survey show some sign of the economy bottoming out.

US consumer prices declined 0.1% for May which was in line with consensus expectations with the year-on-year rate declining to 0.1% from 0.3%. This was slightly below consensus forecasts of 0.2% and the lowest reading October 2015. Core prices also declined 0.1% on the month with the annual rate declining to 1.2% from 1.4% and the lowest reading since April 2015. The dollar edged higher ahead of the Fed policy decision with the Euro drifting lower on position adjustment.

The Fed held interest rates in the 0.00-0.25% range, in line with consensus forecasts. It reiterated that the coronavirus will weigh heavily on economic activity, employment and inflation in the short term and the central bank will use all available tools to support the economy. GDP was projected to decline 6.5% for 2020.

The Fed stated that it would increase its holdings of Treasuries and mortgage-backed securities over coming months at least at the current pace.

The latest median forecasts from individual committee members indicated that the Fed Funds rate was expected to remain at zero until the end of 2022. The dovish rate forecasts were a key element pushing the dollar weaker in immediate reaction with EUR/USD advancing to 3-month highs in the 1.1420 area.

Chair Powell was generally dovish, reiterating no possibility of even thinking of a rate hike, but he also stated that yield-curve control was still an open question. There were also no projections of negative interest rates. The dollar rallied on the commentary with EUR/USD back below 1.1400. Powell was also broadly downbeat over the outlook and commodity currencies retreated. EUR/USD retreated to just below 1.1350 on Thursday amid the more cautious risk tone and a wider US dollar recovery. The Eurogroup meeting will be watched closely during Thursday

The yen maintained a firm tone ahead of the New York open with the dollar unable to make headway. US yields moved lower following the US CPI data which further eroded US currency support and USD/JPY retreated to lows just below 107.20. According to sources, the Bank of Japan does see a pressing need for major action at next week’s policy meeting. The report also indicated the potential for greater flexibility in managing the yield curve.

US Treasuries secured further gains following the Fed announcement and USD/JPY dipped to test the 107.00 area amid US wider losses. The US currency recovered slightly, but the yen maintained a firm tone as US equity markets retreated. Risk appetite retreated on Thursday following the cautious Fed outlook which underpinned the Japanese currency. USD/JPY was just above the 107.00 level after finding support below this level with EUR/JPY around 121.50.

The OECD projected that UK GDP would decline 11.5% for 2020, the worst performance within major economies, with major vulnerabilities due to the dominance of series within the economy. In the event of a second spike, the GDP decline could be around 14%. Despite the OECD report, Sterling maintained a firm tone and GBP/USD hit 1.2800.

Bank of England Governor Bailey stated that there were elements of the recovery starting, but there will be an element of natural caution by people after the lockdown ends. EU chief negotiator Barnier reiterated that there cannot be a deal with the UK without agreement on fishing and a level playing field. He also stated that the relationship with the UK will not be the same as with Canada and Japan while the CBI warned that a no-deal trade outcome must be avoided.

Economic Calendar

06:30Non-Farm Payrolls QQ-2.30%0.40%
09:00Industrial Output YY WDA(APR)--29.30%
09:00Industrial Output MM SA(APR)--28.40%
13:30USD PPI Ex Food & Energy (Y/Y)(MAY)0.90%0.60%
13:30USD PPI Ex Food & Energy (M/M)(MAY)-0.10%-0.30%
13:30USD PPI (M/M)(MAY)0.10%-1.30%
13:30USD PPI (Y/Y)(MAY)-0.20%-1.20%
13:30USD Initial Jobless Claims1550K1877K

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.