Fed Holds Fire, But Has Anything Changed?
Judging by the price action, either market participants didn’t consider the Fed’s decision on Wednesday as an overtly hawkish hold or short-term long US dollar positioning into the FOMC meeting was somewhat over-extended. If the latter, then the subsequent price action may have led to a slight reduction in the long greenback exposure as pairs such as EURUSD and USDJPY saw a guarded degree of post-decision US dollar weakening but the moves were arguably hardly large enough to suggest a sudden change in sentiment. During Thursday’s European session, even as traders await Friday’s all-important US jobs data, market participants might wish to reflect on what the Fed did say as much as what it did not.
Admittedly the Fed did drop both its prior reference to market-based inflation measures having “increased in recent months” and did remove a specific reference to “monitoring inflation developments closely,” but that doesn’t necessarily mean the US central bank has become any less convinced about the trajectory of US prices.
After all there have been recent increases in both US inflation and wages. Indeed the Fed noted how both “overall inflation and inflation for items other than food and energy” have “moved close to 2 percent” with inflation “expected to run near the Committee’s symmetric 2 percent objective over the medium term.” Note the word symmetric. It might suggest to market players that the Fed will tolerate some degree of inflation above its 2 per cent target, just as it had to tolerate an undershoot in recent years. But that still doesn’t mean the Fed will deviate from its rate hiking schedule, even though it will be fully aware that financial conditions have tightened. As every trader will be aware, the cost of running a short US dollar position on a day-to-day basis has risen. Nothing the Fed said or did on Wednesday changes that.
Written by Neal Kimberley, External Currency Analyst.