Fed strike surprisingly dovish tone for interest rate rise

Thursday, March 19, 2015

The US Fed yesterday offered further clarity regarding the path of an eventual interest rates rise, signalling that the central bank was in no rush to increase the interest rate from its record low. As anticipated by most investors the Fed dropped its “patient” outlook offering further insight into the decision making process as it attempted to limit any knee jerk reaction from market participants in order to ensure a smooth transition. However, investors were caught off guard after it said that unemployment still had further to fall despite latest figures putting it at an almost seven year low as it stated that the labour market would need to show further significant improvements. Capping off this surprisingly dovish outlook, the Fed further stressed that inflation would need to be monitored closely and borrowing costs would only be increased when it was “reasonably confident” that it would move back to its 2% target. Additionally, the FOMC lowered growth and inflation forecasts while individual members downgraded their projections of the eventual path interest rates would take. Yellen went further to clarify that while the patient pledge was dropped in its March meeting this did not necessarily indicate a June rate rise was on the cards.

Yesterday’s comments from Yellen prompted a sell-off in the dollar against a basket of major currencies as the dovish statement prompted investors to revise expectations. After opening above 99.60 yesterday the dollar index slipped 3% lower immediately after the comments were made, trading as low as 96.628 before recovering some of the day’s losses as it traded back up towards 98.550 towards the end of the day. The move lower was supportive for US stocks as investors expected the current outlook of low rates to persist for some time after yesterday’s dovish statement. Both the S&P 500 and DJIA add 1.2% apiece. Activity early this morning has seen the dollar index open on the back foot as it struggled to recover territory above yesterday’s close which could offer further support to stock indices.

Gold prices added 1.5% yesterday after the Fed dialled back its forecasts, ending the session at $1,167.61/oz as the yellow metal recovered both this week’s and last week’s losses. Intraday moves saw the precious metal rally towards $1,175/oz, however, prices were unable to gain a firm footing at this level. Activity early on this morning has seen gold prices find firm support around yesterday’s close as intraday moves during the Asian session and early on this morning attempt to push prices past $1,175/oz once more.

DXY sells off on yesterday's FOMC statement

DXY Curncy DOLLAR INDEX SPOT 2015 03 19 07 42 57

Spot gold prices rally on renewed investment demand

XAU Curncy Gold Spot Oz 2015 03 19 07 43 10

Events for today

0900

EZ

Mar

ECB Economic Bulletin

1330

US

w/e

Jobless Claims

1400

US

Mar

Philadelphia Fed Business Outlook

1400

US

Feb

Leading Index

1530

US

w/e

EIA Nat Gas

Topics: US Fed, Gold, Inflation, DXY
More from: Kash Kamal