US dollar analysis: Fed threads the needle, still sees no cuts

US dollar and Fed takeaways

• The Fed hiked rates by 25bps to the 5.00-5.25% range, as widely expected. In its statement, the FOMC removed its reference to future interest rate increases, hinting at a likely pause in June.
• Fed Chair Powell minimized fireworks in his press conference, though he steadfastly refuses to entertain rate cuts any time soon.
• The US dollar bounced off its lows but remains subdued. EUR/USD traders will now turn their attention to the ECB.

Fed meeting decision

As widely expected, the Federal Reserve’s FOMC chose to raise interest rates by 25bps to the 5.00-5.25% range. This marks the central bank’s 10^th consecutive interest rate increase off the 0% level, dating back to March 2022.

Fed monetary policy statement

In its accompanying monetary policy statement, the Fed made some key updates, notably toning down its reference to anticipating “additional policy firming” (read interest rate increases) and removing its reference to “future increases in the target range” for interest rates:

Source: Federal Reserve, StoneX

As the Wall Street Journal’s “Fed Whisperer” Nick Timiraos noted, “The statement used language broadly similar to how officials concluded their interest rate increases in 2006, with no explicit promise of a pause by retaining a bias to tighten.”

The decision was unanimous.

Fed Chairman Powell’s press conference

Chairman Powell is still winding down his press conference as we go to press, but with most of the pontificating behind us, Powell appears to be threading the needle between leaving the door open for additional rate hikes while remaining responsive to the current banking stresses. Crucially, he’s been pushing back relatively aggressively against any interest rate cuts this year, something the market had (and still has to an extent) priced in.

Highlights from the press conference follow [emphasis mine]:

• THE BANKING SECTOR'S CONDITIONS HAVE GENERALLY IMPROVED.
• WE WILL USE DATA TO DETERMINE THE EXTENT OF FUTURE RATE INCREASES.
• LABOR MARKET REMAINS VERY TIGHT.
• WAGE GROWTH HAS SHOWN SOME SIGNS OF EASING.
• THE ECONOMY IS LIKELY TO FACE HEADWINDS FROM CREDIT CONDITIONS.
• WE ARE PREPARED TO DO MORE IF MORE IS WARRANTED.
• A DECISION ON A PAUSE WAS NOT MADE TODAY.
• THE STATEMENT CHANGE WAS MEANINGFUL.
• MORE DATA WILL BE REQUIRED BEFORE WE CAN DECLARE THAT WE HAVE REACHED A SUFFICIENTLY RESTRICTIVE STANCE.
• WE ARE ATTEMPTING TO ACHIEVE, AND THEN MAINTAIN, A SUFFICIENTLY RESTRICTIVE STANCE IN ORDER TO REDUCE INFLATION.
• AVOIDING A RECESSION IS MORE LIKELY THAN EXPERIENCING ONE.
• WAGE INCREASES NEED TO BE CLOSER TO 3%
• THE FED'S ATTENTION WILL NOW SHIFT TO CREDIT TIGHTENING.
• RATE CUTS WOULD BE INAPPROPRIATE GIVEN OUR BELIEF THAT INFLATION WILL TAKE SOME TIME TO SUBSIDE.
• WE WILL NOT CUT RATES IF INFLATION REMAINS HIGH.

US dollar technical analysis: EUR/USD

The initial reaction to the Fed’s decision and statement showed that the market was relatively calibrated in expecting a dovish hike. The US dollar and short-term interest rates initially dipped before recovering to near-unchanged levels ahead of Fed Chairman Powell’s press conference.

The early part of the press conference went mostly according to the script, with a bit of chop but no major market moves. Toward the end of the press conference, the Chairman began to push back more aggressively against interest rate cuts this year, leading to a slight risk-off move. As we go to press, the US dollar is recovering off its lows against its major rivals (though still down across the board), major indices are dripping lower, and gold is holding steady above $2,020.

With Fed-related volatility now mostly behind us, EUR/USD traders will shift their focus to tomorrow’s ECB meeting. In the short-term, bulls will be looking to drive the pair above horizontal resistance in the 1.1075-1.1100 area to extend the ongoing rally toward 1.1200 in the coming days. On the other hand, a break below the rising 21-day EMA below 1.10 would signal a deeper pullback may be in the cards.

Source: StoneX, TradingView

-- Written by Matt Weller, Global Head of Research