Little changed FOMC statement maintains dovish uncertainty weighs further on dollar

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By :  ,  Financial Analyst

The July FOMC statement was released on Wednesday afternoon, and there was very little in the way of deviation from expectations, or even from the last statement in June. Rates were kept unchanged this time around, as overwhelmingly expected, and the only substantive changes in this statement from June’s statement were slight modifications in the Fed’s wording with respect to inflation and balance sheet reduction.

Regarding inflation, the statement again stressed that inflation overall is “running below 2 percent,” but eliminated the word, “somewhat.” As for balance sheet reduction, the new statement declared that normalization would begin “relatively soon,” as opposed to June’s assertion of “this year.” Overall, these minor semantic changes accompanying unchanged monetary policy did little to affect the markets’ already-dovish outlook. Not only were there clearly no hawkish surprises in this FOMC statement, the Fed’s continued lack of concrete confirmation on balance sheet normalization simply extended the prevailing dovish uncertainty.

This sustained dovishness affected both the dollar and gold substantially in their immediate market reactions. In the aftermath of the statement’s release, the dollar extended its recent weakness, falling sharply against its major counterparts. As a result, EUR/USD quickly rose to hit and then exceed major resistance around the 1.1700 level, establishing a new long-term high not seen since the beginning of 2015. Likewise, USD/JPY fell sharply from the key 112.00 resistance level, where it had been fluctuating prior to the statement. For its part, gold also reacted strongly to the extended dollar weakness and continued dovishness from the Fed. The precious metal rose well above the key $1250 psychological level to hit a new six-week high.

While a weaker dollar is conducive to Fed policy tightening, and should eventually begin to recover once the Fed actually resumes policy normalization, the short-term impact of continued Fed dovishness is likely to sustain pressure on the dollar for the time being, helping to push EUR/USD to new highs and gold towards a further recovery in the near-term.

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