US dollar loses steam on the back of the Fed

The main theme in the FX space was US dollar positioning heading into the FOMC meeting and the reaction to the results of the meeting. 

Source: Bloomberg

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. 

IGA, may distribute information/research produced by its respective foreign marketing partners within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

This information/research prepared by IGA or IGA Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

See important Research Disclaimer.

Find articles by analysts

Find out more about