FOMC maintains strict support citing sharp but uneven recovery - what next for dollar?

TigerWit Africa

The FOMC on Wednesday kept the federal fund rate unchanged at 0-0.25%. Its refusal to taper the current asset purchase values drag the dollar lower and pushed S&P 500 to a fresh record high. 

Fed went dovish, no taper yet until targets are met

The Fed Chair Powell said although the economy is recovering at a very fast pace, the recovery is quite uneven and there is no need to taper its current monetary policy yet. Tapering would happen, but not just yet. Therefore, the bank maintained its current monthly bond purchases at $120 billion per month. Reaffirming its support until inflation and maximum employment targets are met, the bank’s top guns understood that the path of recovery would significantly depend on the progress of vaccination, new virus mutation and developments around the world.

So far, the current recovery is far from meeting the 2% inflation target and maximum employment goal. Inflation has been investors’ major worries in this time of unlimited QE but the Fed said it’s opened to over 2% inflation rate over time with the expectation that the average over the long-term would be around 2%. Also, it’s more worried about employment. The number of unemployed persons in the US dropped by over 200k in March thus collapsing the unemployment rate to 6%. However, the positive employment change doesn’t tell the main story – over 9.7 million persons are still unemployed. It’s going to take some time and the Fed maintains strict support.

How the dovish Fed impact the market

The dovish nature of today’s FOMC added to gains in the equities market as the S&P 500 rocketed above 4200 – a new record high. However, much of the gain has been retraced as the index dipped back to 4180 at the time of writing. Meanwhile, the dovish effect was more visible on the dollar. The dollar index (DXY) dropped to its lowest since late February. In April, the greenback has now shed 2.8% – about 2/3rd of the Q1 gains. Gold quickly recovered to 1780 to get back much of the week’s earlier gains.

In the FX market, the dollar weakness spread across the board. EURUSD sharply broke above the 1.21 psychological level – gaining 70 pips within the first hour of the announcement. GBPUSD also roared to the 1.395 diagonal resistance zone while USDJPY only plunged a bit of Monday and Tuesday’s gains returning from 109 psychological level. AUDUSD and NZDUSD also recorded significant gains.

The press conference cut back on the momentum but nothing is going to change yet. The Fed is dovish and crushed the market expectation of a near-term taper. The markets are expected to adjust in the Asian session and then decide what next.

DXY technical analysis – will the dollar stage a rebound?

The much-expected FOMC has come and gone. Investors will have to digest this and look at what next. It, therefore, does not necessarily mean the dovish Fed would impact the market much further especially with the reversal pattern on the DXY chart below.

It’s clear that the dollar index has approached an oversold region. We have had a bearish impulse wave since March 31 at 93.44. The 5th wave is currently completing an ending diagonal reversal pattern. If the dollar bounced off the current 90.5 psychological support and broke above 91, the much anticipated 3-wave bullish correction back to 92 is a very good option. We can then see the dollar recover across the board in the other half of the week.

However, a continued bearish effect of the dovish Fed should not be overlooked. The current bearish impact might extend and drag the dollar index to violate the diagonal pattern. Therefore, if this dip extends to 90.4, we should see more decline to the next psychological support at 90.

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