While the Fed tried to maintain a neutral/balanced tone, it seems the market felt ‘less dovish’ is the best way to describe the outcome. On the labour market, the Fed dropped the word elevated regarding unemployment, but balanced this out by saying there remains significant underutilisation of labour resources.
Regarding inflation, the Fed feels downside risk has been significantly reduced. Another interesting development was that Philly Fed member Charles Plosser objected to the retained guidance that it will likely be appropriate to maintain the current target range for the Federal funds rate for a considerable time after the asset purchase program ends. Additionally, GDP smashed estimates coming in at an annualised 4% versus 3.1% expected. The strong GDP reading saw treasuries weaken.
Traders looking to buy USD/JPY dips
The US dollar index surged to above 81.50, but has since retreated to around 81.40. Essentially the market had been quite bullish heading into the FOMC meeting and we are now starting to see an unwind of USD longs. Exactly how deep the pullback will be remains debatable, but there are two key currency pairs to watch at the moment.
USD/JPY surged to a high of 103.09, but has since pulled back to 102.79 as the greenback loses some steam. Buying pullbacks in USD/JPY seems to be a reasonable strategy after the recent move higher.
Euro likely to be sold into strength
Meanwhile, EUR/USD managed to recover from its lows, but continues to struggle at 1.3400. Selling the euro into strength is what traders are currently looking at and this strategy is likely to play on, with Russia remaining a concern for the region.
It’s not over yet for these key currency pairs as event risk in the US will continue to ramp up heading into the end of the week.