Fed July Meeting: A Dovish Hike with an Open-End Story

The 25 basis points interest rate hike by the Federal Reserve in July was well anticipated. The real focus of this meeting was Federal Reserve's stance on whether its tightening cycle had come to an end.

FOMC July Meeting Key Takeaways

First, the Federal Reserve stressed that after this rate hike, they would adopt a "wait-and-see" approach to decide their monetary policy meeting by meeting, refraining from making early judgments regarding the next move. Previously, in some meetings, the Fed would mention that "further rate hikes are appropriate" to indicate the necessity of continuing rate increases.

Second, data-driven decision making. The Fed emphasized its reliance on upcoming economic data for future meetings. This message may seem repetitive, but it holds significant importance for the next FOMC meeting, which is nearly two months away. It implies that if economic data in August shows any signs of a turnaround or other emerging factors, the Fed has sufficient reason to reverse its stance from the July meeting.

Third, the Fed praised the progress on inflation. The most recent data suggested inflation in the US has dropped to 3%. However, the Fed reiterated its mandate to bring down inflation to 2%, which seems non-negotiable.

Fourth, regarding the outlook for the economy, the Federal Reserve reworded it as “moderate pace”from “modest pace”used in the past statements. It appears that the recent strong data from US retail data and the better-than-expected GDP figures have evidently bolstered the Fed's confidence in avoiding the recession that the market had been most concerned about.

The Impact on The Market

After the announcement of the Federal Reserve’s rate decision, US bond yields dropped with the two-year Treasury yield fell to 4.84%. US stocks initially rose but later fell, possibly due to investors adopting a "buy the rumour, sell the fact" strategy.

Looking ahead, although the July interest rate meeting seemed to be dovish, it introduced more uncertainty. The upcoming US second-quarter GDP report and the PCE numbers may soon become new variables, given the Fed's underscored "data-dependent" approach.

US Dollar Technical Analysis

Based on the 1-hour technical chart, the US dollar dropped sharply after the announcement, breaching through the trendline since July 18, but it eventually stabilized around $100.46. However, this trendline is expected to turn a major resistance level for any near-term rebound.

On the daily chart, overall, the downtrend of the greenback remains solid as suggested by lower highs. Near-term resistance can be found from the 20-day moving average as well as January low (around 101.2), while support could come from the bottom in April (100.40).