Federal Reserve held interest rates at 1.75%, in line with expectations.

The Federal Reserve held interest rates at 1.75%, in line with expectations. Chair Powell reiterated barriers to interest rate hikes with comments considered dovish.

The dollar index declined after the decision with a 4-week low and EUR/USD pushed to 5-week highs around 1.1140. Sterling was resilient despite increasing political tensions with GBP/USD at fresh 7-month highs above 1.3200.

Commodity currencies made significant net gains with AUD/USD at 1-month highs on short covering.

US equity markets edged higher, but trade uncertainty triggered wider caution and mixed performances.

The Federal Reserve held interest rates at 1.75%, in line with consensus forecasts with a unanimous vote. According to the statement, job gains had been solid with economic activity rising at a moderate pace. Household spending was growing at a strong pace while investment remained weak. Inflation remained below 2%, but there were indications of a prolonged pause as references to uncertainty over the outlook were dropped, although it will continue to monitor incoming data.

According to forecasts of individual members, interest rates are expected to remain on hold through 2020 with no members projecting a cut.  Initial reaction was muted with the dollar fractionally weaker as the Euro edged higher.

Chair Powell reiterated that it would take a persistent move higher in inflation in order for the Fed to hike interest rates, reinforcing expectations of a medium-term dovish policy shift. The dollar continued to lose ground on Powell’s rhetoric and expectations of increased liquidity with the currency retreating to 4-week lows and EUR/USD at 5-week highs around 1.1140.

No policy changes are expected by the ECB at Thursday’s policy meeting, but the first Press Conference from President Lagarde will be monitored very closely for evidence on the likely underlying stance and the dollar remained on the defensive.

After significant losses overnight, GBP/USD held above 1.3100 and gradually regained ground the day despite uncertainty over the election outcome. A Conservative majority was still seen as the lost likely outcome which limited selling as average opinion polls indicated a comfortable lead. Gains in commodity currencies also had some beneficial impact The Euro was little changed and GBP/USD again challenged 1.3200 after the Federal Reserve decision.

Tensions will inevitably be high during Thursday with a blackout of political coverage during the day. The key exit poll will be released at 22.00 GMT which will trigger the first sharp Sterling move. Evidence of a Conservative majority would support the currency while any other outcome would be likely to trigger sharp losses. The RICS housing index declined to -12 from -6 previously, although political developments will inevitably dominate with GBP/EUR around 1.1850 in early Europe and GBP/USD close to 7-month highs above 1.3200.

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