Markets Adjust Expectations Post FED Rate Meeting

GBP/USD rate rebounds after Fed rate hike bets put to bed

The Pound to Dollar exchange rate rose to a high of $1.2550 after Federal Reserve Chair Jerome Powell stated that he expects inflation to fall over the course of the year and that a further rate hike is "unlikely". Ahead of this week's Federal Reserve Open Market Committee (FOMC) decision, investors had raised expectations that the Fed's next move could be a hike, with options markets showing this to be a 20% probability. "I think it’s unlikely that the next policy rate move will be a hike. I’d say it’s unlikely," Powell said, which erased these expectations and took some heat out of U.S. bond markets, as well as the Dollar. The base case market assumption heading into the FOMC was that the Fed would likely cut interest rates for the first time in December, and this expectation is relatively unchanged after midweek events. Goldman Sachs leaves its forecast unchanged and expects two rate cuts this year, in July and November. Should this outcome be realised, a significant repricing in U.S. interest rates is in store, which can lead to more durable weakness in the Dollar.

No Major Data

Swiss inflation, Euro area manufacturing PMIs on the agenda today

Looking to European trading today, there won't be much on the data docket to shake things up in the big picture. There is Swiss inflation data and we'll see if that will vindicate the start of the SNB's rate cut cycle. The expectation is for a 1.1% reading for headline annual inflation. As well as Euro area PMI data but they are the final figures for the manufacturing reading. As such, its unlikely to move the market substantially. EUR/USD continues to gain ground today as the prevailing positive sentiment in the market provides support for risk-sensitive currencies like the Euro. This improved risk appetite could be attributed to dovish remarks from Federal Reserve Chairmen Jerome Powell on Wednesday. At the time of writing EUR/USD trades at $1.0717.

Major Data:

Swiss Consumer Price Index (MoM)(Apr): 0.3%

Swiss Consumer Price Index (YoY)(Apr): 1.4%

Swiss Real Retail Sales (YoY)(Mar): -0.1%

US Dollar struggles to rebound as markets assess Fed announcements

USD suffered large losses against its major rivals in the late American session on Wednesday as the Federal Reserve's (Fed) statement language and Chairman Jerome Powell's comments turned out to be not as hawkish as feared. Later in the day, weekly Initial Jobless Claims and Unit Labor Costs data for the first quarter from the US will be watched closely by market participants. The Fed left the policy rate unchanged at 5.25%-5.5% as expected. In its policy statement, the Fed acknowledged that there has recently been a lack of further progress toward the 2% inflation target. Regarding the quantitative tightening strategy, the Fed noted that they will slow the decline of the balance sheet by cutting the Treasury redemption cap to $25 billion per month from $60 billion starting June 1st. In the post-meeting press conference, Chairman Powell refrained from hinting at the timing of a policy pivot but said that it was unlikely that the next interest rate move would be a hike. "To hike, we'd need to see evidence policy is not sufficiently restrictive -- that's not what we see," he explained. After fluctuating wildly during the press conference, the USD Index turned south and lost over 0.6% on a daily basis on Wednesday. Early today, the index moves up and down in a tight channel above 105.50. Meanwhile, the benchmark 10-year US Treasury bond yield stays in negative territory slightly above 4.6% and US stock index futures trade modestly higher.

Major Data:

Initial Jobless Claims(Apr 26): Exp, 212K