Daily Market Update

Dollar down as global optimism outdoes Fed hike

March 23, 2023

The United States Dollar slipped in a big way across the board yesterday on the heels of a 25 basis point rate hike from the Federal Reserve. 

Overview

Though traditionally, a rate hike would prompt a winning streak for USD, the devil was in the details of Chair Jerome Powell’s statement. The Fed showed clear signs of sensitivity to recent developments in the US financial sector and changed its language on future guidance to reflect ongoing economic uncertainty.The Fed’s statement on yesterday’s moves and Powell’s subsequent press conference struck a remarkably dovish tone, and currency markets responded in kind. While previously the committee emphasized their plan to continue their tightening cycle in each statement, yesterday’s words were much softer and really left the door open for a pause. It is clear that the Fed, while very sensitive to the country’s economic climate and uncertainty, is still focused on tackling inflation.Though still aiming for a mythical “soft landing,” Powell seemed to be priming markets for the possibility of a recession inside the US. The Fed’s options as of now are limited, and it finds itself between a rock and a hard place. The Buck lost well over a percent in trading yesterday against nearly every major currency on what’s being viewed as a dovish hike and continues losses into this morning.

 

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EUR  ⇑

The single currency posted a gain of over a percent against the USD during trading after the Fed announcement before settling back to run roughly nine-tenths of a percent higher. Powell’s press conference showed a divergence from the strong language used by Christine Lagarde and the ECB when the central bank met last week and raised the Eurozone’s interest rate by 50 basis points. Markets read into this difference, selling off the Buck in a big way.

 

GBP  ⇑

Pound Sterling won out against USD yesterday on the heels of the Fed and this morning the Bank of England raised interest rates in the region by another 25 basis points. Until yesterday morning’s release of CPI in the UK, any hike at all was read as unlikely, but a huge upside surprise changed the BoE’s calculation as record-high inflation remains deeply entrenched. Currently, markets see the potential for just one more hike from the Bank of England, though it’s possible this means they continue hiking after the Fed pauses and prompts more GBP strength down the road.

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