Fed leaves rates at 5.25%.

The Federal Reserve held interest rates at 5.25% following the latest policy meeting. This was in line with consensus forecasts and the vote was unanimous.

According to the statement, the decision to leave rates unchanged at this meeting will give the central bank time to assess additional information and its implications for monetary policy.

The Fed released the latest set of economic projections with most attention on the forecasts for the Fed Funds rate. The end-2023, forecast was raised to 5.6% from 5.1% previously with the 2024 forecast increased to 4.6% from 4.3%. A majority of committee members expect that the central bank will increase rates again this year.

Fed Chair Powell stated that nearly all policymakers view some further rate hikes this year as appropriate and that the labour market remains very tight. He added that a pause is a continuation of moderating the pace of rate hikes.

He did add that the full effects of tightening had not been seen. He insisted that decisions will be taken on a meeting-by-meeting basis and that July decision had not been made, but the meeting would be live. Powell expects that there will be a big dose of disinflation from the housing sector. He added that the forces that slow inflation are coming into place, but it will take some time. Powell reiterated that rate cuts were not expected this year.

The increase in dot plot forecasts had the biggest impact with markets pricing out the potential for rate cuts this year.

The dollar recovered from 4-week lows after the decision and posted gains with principal selling through the yen. The Japanese currency remained under heavy pressure with USD/JPY at 6-month highs and heavy yen selling on the crosses. Japanese verbal intervention had little impact.

The latest labour-market data was stronger than expected with a jump in employment of close to 76,000 for May compared with expectations of close to 20,000 while the unemployment rate edged lower to 3.6% from 3.7%.

The data will maintain pressure for further RBA rate hikes.

The ECB will announce its latest interest rate decision on Thursday. Consensus forecasts are for a further increase of 25 basis points in the refi rate to 4.00%. Forward guidance from the bank and President Lagarde, together with the latest forecasts will be watched closely.

There will be important US data points on Thursday with the latest retail sales data and jobless claims releases. The latest New York and Philly Fed manufacturing surveys are also due.

Weaker than expected data could shift the overall narrative while strong data would bolster the Fed narrative.

The Bank of Japan will announce its latest policy decision on Friday with no policy change expected.

The dollar lost ground after the producer prices data and weakened further into the Federal Reserve decision with the currency index at 4-week lows. EUR/USD strengthened to 4-week highs at 1.0865. The dollar rebounded in immediate reaction to the Fed decision. EUR/USD found support on a dip to near 1.0800. EUR/USD settled around 1.0815 on Thursday with a firm net dollar tone.

The yen failed to sustain rallies. From lows at 139.30, USD/JPY jumped to above 140.00 after the Fed decision before fading again. The yen came under further selling on Thursday with USD/JPY surging to 6-month highs just below 141.50.

Sterling maintained a firm overall tone on yield grounds. GBP/USD peaked fractionally below 1.2700 before a sharp correction after the Fed decision. GBP/USD settled around 1.2650 on Thursday.

The Australian dollar posted solid gains on Wednesday on hopes for a further Chinese stimulus. AUD/USD hit 0.6835 highs before a dip. Strong Australian jobs data was offset by weaker than expected Chinese data with AUD/USD trading just above 0.6800. USD/CAD found support below 1.3300 and settled around 1.3340.

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