Fed causes dollar collapse as Powell says cuts coming

Key points

• FOMC leaves rates unchanged, signals rate cuts coming
• Equities rose on the news, causing an all-time high in the Nasdaq
• AUD/USD rose over 150 pips Wednesday, driven by the news

Fed meeting brings markets up, leaving dollar behind

The highly anticipated December Federal Open Market Committee (FOMC) meeting caused a sharp reaction in all markets Wednesday afternoon, after Fed chair Powell and the rest of the committee confirmed the widely held belief that rate cuts are on the way.

While the final Fed meeting of the year did not result in an immediate rate cut, the central bank did pave the way for a potential easing of rates in 2024. The 'dot plot,' a projection of future rate paths by Fed members, suggests that rates could be adjusted downward to around 4.5% or possibly even to the 3.5% range in the subsequent years. This shift in stance, from a hawkish to a more dovish outlook, has significant implications for the markets.

When central banks signal a dovish stance, it often results in a depreciation of the nation's currency. The US dollar, for instance, has seen a weakening against other major currencies, reflecting the market's anticipation of lower US interest rates relative to other economies.

Forex pairs like EUR/USD, GBP/USD, and AUD/USD shot up through key levels on the news. EUR/USD hit 1.0900, GBP/USD passed 1.2600 and AUD/USD soared through 0.6600. AUD/USD gained over 150 pips on the day.

In the equities market, the NASDAQ Composite Index (IXIC) responded positively to the dovish signals, with technology stocks pushing the index toward new all-time highs. The prospect of lower interest rates typically encourages investment in growth stocks, as borrowing costs decrease and consumers potentially have more disposable income to spend on goods and services.

The bond market also reacts inversely to interest rate expectations. When rates are anticipated to fall, bond prices tend to rise, as the fixed interest payments of existing bonds become more attractive compared to new bonds issued at lower rates. The yield on the benchmark 10-year Treasury note (TNX) declined, reflecting this inverse relationship and the market's pricing in of a more accommodative monetary policy.

Commodities like gold, often seen as a hedge against currency devaluation and inflation, have also ascended in price, while cryptocurrencies, which sometimes benefit from a weaker dollar and risk-on sentiment, have seen an uptick in value.

Traders are now closely watching the Fed's next moves, with futures markets pricing in a high probability of a rate cut by the March 2024 meeting. This recalibration in expectations has led to a dynamic trading environment where opportunities abound for those ready to capitalize on the shifts in sentiment and policy.

How to trade US dollar

1. Open an account to get started, or practice on a demo account
2. Choose your forex trading platform
3. Open and close positions on USD pairs

Trading forex requires an account with a forex provider like IG. Many traders watch major forex pairs like EUR/USD and USD/JPY, which can be found in IG's platform under the 'Major' pairs tab, for potential opportunities based on economic events such as inflation releases or interest rate decisions. Economic events can produce more volatility for forex pairs, which can mean greater potential profits and losses as risks can increase at these times.

You can help develop your forex trading strategies using resources like IG’s YouTube channel. Our curated playlists can help you stay up to date on current markets and understanding key terms. Once your strategy is developed, you can follow the above steps to opening an account and getting started trading forex.

Your profit or loss is calculated according to your full position size. Leverage will magnify both your profits and losses. It’s important to manage your risks carefully as losses can exceed your deposit. Ensure you understand the risks and benefits associated with trading leveraged products before you start trading with them. Trade using money you’re comfortable losing.