FOMC Projections Send Greenback Higher

Adam Lemon

The US Federal Reserve yesterday raised its forecasts for inflation and the pace of rate hikes, sending stock markets lower and the U.S. dollar higher.

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Yesterday’s Federal Reserve statement and economic projections may have injected some directional momentum into the Forex market after several weeks which have seen major currencies consolidate with low volatility. This release may be the trigger for more sustained bullish sentiment on the USD, so this development is something traders should be paying attention to.

FOMC Economic Projections

The FOMC revised its prediction for the overall 2021 inflation rate strongly upwards, from 2.4% last month to 3.4%. Although this is well above the Federal Reserve’s target rate of 2%, Fed officials seem to be firm in their belief that this increase will be short term and transitory and will quickly average back down to 2%. Some analysts are convinced by this, while others are more fearful. We have already seen the U.S. inflation rate leap to an annualized rate of 5% just a week ago.

The FOMC also released the expected rate hike timeline from its members, and this has also produced a significant shift from last month, when the consensus saw no rate hikes before 2024. Now, the members collectively expect in their “dot plot” that the Federal Reserve will need to raise rates twice during 2023.

Finally, the FOMC also raised its forecast for 2021 GDP growth strongly upwards, to an anticipated 6.5% from last month’s 4.2%.

Market Impact

As a clear result of the forecast release, the US dollar climbed quite strongly within the first hour, and after not doing very much during the Asian session, has started again climbing to new highs. At the time of writing, the U.S. Dollar Index was up by 0.84% from its pre-release level.

Drilling down to the greenback’s performance against individual assets, we see it has risen most strongly against the following assets:

ASSET

% Fall Against Dollar Since FOMC Release

Gold

3.14%

Swedish Krona

2.31%

Norwegian Krone

2.23%

Euro

1.50%

British Pound

1.04%

Japanese Yen

0.76%

Although the Japanese yen has lost relatively little ground to the greenback in absolute terms, the bullish move seen in the USD/JPY currency pair is technically significant, as the price not only ended yesterday at a breakout to a new multi-month high, the 1-year high at 110.97 is not far off. As this currency pair has tended to trend reliably, it may be the most fruitful medium- to long-term ground to trade the USD rise. However, right now, there is no doubt that the more minor euro-linked currencies such as the SEK and NOK are falling fastest.

What Does This Mean for Traders?

There are only a few times in a year – if even that – when traders need to sit up and pay attention to potentially major shifts in market sentiment. This is because these changes often begin long-term trends which represent the easiest and best opportunities for profit. Today is one of these moments. Traders should not follow blindly but should be seriously looking to enter long trades in the U.S. dollar, especially against currencies which are relatively weak.

Adam Lemon

Adam Lemon began his role at DailyForex in 2013 when he was brought in as an in-house Chief Analyst. Adam trades Forex, stocks and other instruments in his own account. Adam believes that it is very possible for retail traders/investors to secure a positive return over time provided they limit their risks, follow trends, and persevere through short-term losing streaks – provided only reputable brokerages are used. He has previously worked within financial markets over a 12-year period, including 6 years with Merrill Lynch.
Learn more from Adam in his free lessons at FX Academy

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