Dovish rate projections and rhetoric boosted risk appetite.

The Fed made no changes to interest rates or bond purchases, in line with expectations. The median dot plot still showed no rate increase before 2024 compared with expectations of a move to 2023.

The dovish rate projections and rhetoric boosted risk appetite. Wall Street equities posted fresh gains to a new record high with a solid performance in Asia.

The dollar dipped sharply following the policy statement with a retreat to 1-week lows. EUR/USD posted net gains but was held below 1.2000. The dollar pared losses on Thursday as long-term US yields moved higher. Sterling was hampered by unease over the vaccination programme with GBP/USD below 1.4000.

Commodity currencies posted strong gains after the Fed decision with USD/CAD at 35-month lows before a correction. Strong jobs data also underpinned the Australian dollar.

Narrow ranges inevitably prevailed ahead of Wednesday’s New York open with caution ahead of the Federal Reserve policy decision. The euro was unable to gain any traction and EUR/USD settled just above the 1.1900 level. The single currency was hampered by further concerns over the Euro-zone vaccine programme.

Ahead of the statement, futures markets priced in a 90% chance of a rate hike by the end of 2022 and three hikes in 2023 and EUR/USD remained just above 1.1900.

The Federal Reserve held interest rates at 0.25% and made no changes to the bond buying programme. Both decisions were in line with consensus forecasts and with  unanimous votes. There was a sharp upgrade to the 2021 GDP growth forecast to 6.5% from 4.2% previously with unemployment also expected to decline sharply.

There was a big focus on the dot plot of individual Fed Funds rate projections. Although seven members expected rates to be increased in 2023, the median projection was for rates was still unchanged, contrary to market expectations that there would be a shift to forecasting a rate hike.

Fed Chair Powell reiterated that the central bank is strongly committed to achieving its goals and will continue to provide support for as long as needed.

Powell expects inflation increases to be transitory and would not spark a policy change, but did note that there could be some upward pressure on prices as the economy continues to re-open. He also stated that the only way to build credibility surrounding the average inflation target was by doing it.

The rate projections triggered sharp dollar losses and there was no recovery as Powell maintained a dovish stance with EUR/USD peaking just below 1.2000.

Exit polls indicated that Dutch Prime Minister Rutte would secure a fourth term in the general election as support for populist parties declined.

The dollar remained vulnerable on Thursday although underlying Euro sentiment also remained fragile. EUR/USD advanced to around 1.1990 before a retreat to 1.1960 as US yields increased.

There were further reports that Japan’s state of emergency would be ended this week, but there was little impact on the yen as the focus remained on US developments.

US housing starts declined to an annual rate of 1.42mn for February from a revised 1.58mn previously and below expectations of 1.56mn as adverse weather conditions undermined activity. Building permits also slowed to an annual rate of 1.68mn from 1.89mn the previous month. The dollar posted tentative gains into the Fed policy decision with an advance to 109.30 against the yen. There was a significant increase in bond yields which supported the US currency, although equities edged lower.

Bond yields then moved lower following the dovish Fed statement and USD/JPY initially retreated to the 108.80 area from 109.30.

There were media reports that the Bank of Japan on Friday would widen the target bank for the 10-year yield to plus/minus 0.25% from 0.2% at present. The yen gained support on expectations of a slightly less accommodative policy, although there was selling on rallies with USD/JPY above 109.00 from 108.60 lows and EUR/JPY at 130.50 as long-term US yields moved higher.

The UK currency held a firm tone in early Europe on Wednesday but was unable to make further headway as EUR/CHF found support below the 0.8550 level.

Sterling edged lower after the Wall Street open with concerns over a fresh vaccine row as the EU threatened to ban exports from the EU. Any restrictions of supply would cause significant damage to the UK vaccination programme. Foreign Secretary Raab stated that he expected contracted vaccine supplies to be respected.

Confidence dipped again towards the European close with evidence that there would be a slowdown in vaccination rates in April due to supply difficulties.

Dollar weakness dominated after the Fed policy decision with GBP/USD strengthening sharply to near 1.3950 while GBP/EUR strengthened to near 1.1680. The dovish Fed policy also helped underpin risk appetite which provided an element of Sterling support.

The UK currency maintained a strong tone on Thursday with a GBP/USD challenge on 1.4000 while GBP/EUR rallied to around 1.1675. Markets expect that the Bank of England will adopt a cautiously optimistic tone in its policy statement, but potentially push back against any expectations of rate increases.

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