Fed Delivers The Goods

The Fed went ahead with the well-expected .25% hike at its March meeting yesterday. Along with raising rates, which were voted for 8-1, the Fed also upgraded its dot-plot forecasts and economic projections. The Fed now forecasts 7 hikes over the year, up from just three in December, in line with the market’s expectations. Additionally, the individual dot-plot forecasts showed that over half the voting members saw more than 7 hikes this year, a firmly hawkish development.

With regard to the economic forecasts, again, the updates were broadly as expected. The Fed sees slightly reduced growth and higher inflation. Additionally, most members saw upside risks in the inflation outlook. Looking ahead, the Fed noted that QT will begin at a “coming meeting”, with the market currently pegging May as the likely start date.

In all, it was a firmly hawkish meeting, so why are we seeing a weaker USD today? Firstly, while the meeting was hawkish, there was nothing in it which particularly stood out above current market expectations. Perhaps the individual dot-plot forecasts. However, the bigger issue, it seems, is that the market is potentially starting to look at the hit to growth that will come as the Fed begins tightening, especially given the risks around the ongoing violence in Ukraine, with some sense that this might in fact weaken USD longer term.

Technical Views

DXY

For now, the Dollar index remains within the block of consolidation which has formed between 97.90 and 98.94. Price is still holding within the upper part of the bullish channel and, while above the 97.08 level, the outlook remains bullish. Indicators are turning quickly lower, however, suggesting risks of a deeper correction.