The Federal Reserve Turns Hawkish, Sending the US Dollar Higher

FXOpen

Last Wednesday, the Federal Reserve of the United States (Fed) took financial markets by surprise. It delivered a hawkish message, as suggested by the dot plot that showed two possible rate hikes in 2023, rather than just one as the market participants expected.

As a reminder to all traders and investors, the Fed has a dual mandate – to maintain price stability and to create jobs. It delivers its monetary decisions based on interpreting the balance between the two parts of its mandate.

While job creation posed challenges due to the coronavirus pandemic, the Fed had an easier task fulfilling the inflation-targeting mandate.

The Federal Reserve Turns Hawkish, Sending the US Dollar Higher

Like most central banks in the developed world, the Fed targets inflation close to 2%. Or, at least it used to have this target.

It changed it last August. At the Jackson Hole Symposium last August, the Fed shifted its inflation target from reaching close to 2% to averaging 2%. From that moment on, speculations mounted as to what is the period the Fed will consider for averaging inflation.

Based on its recent decision, it appears that inflation, and not employment, is a concern for the Fed.

US Dollar Ripping Higher on Hawkish Fed

One may say that the Fed took markets by surprise, but the staff’s economic projections left no other choice. The US economic growth forecast was lifted higher for both 2021 and 2023, and so was the inflation forecast.

As such, the Fed raised the interest rate on excess reserves by five basis points in a first attempt to normalize rates. Judging by the market’s reaction, they were taken by surprise as the US dollar gained across the board on the Fed’s message.

The EURUSD pair closed the week well below 1.19, after trading with a bid tone above 1.21 for most of the past two months. Also, the AUDUSD or the GBPUSD lost ground, in a piece of further evidence that the US dollar bears were taken by surprise.

Moving forward, it remains to be seen what will other central banks do. Brazil already reacted, by raising the interest rates, in a classic move from an emerging market’s central bank after the Fed turns hawkish.

The big question is – what will other central banks from the developed world do? The first one to watch is the Bank of England, as the Monetary Policy Committee is due to deliver its decision this upcoming Thursday.

This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.

Latest from Financial Market News

The US Continues to Trump the Euro Economy on Key Metrics, But What Is Next? Is the UK really in a recession? Perhaps 2024 data will be different Weekly Market Wrap With Gary Thomson: US INFLATION, GBP/USD, GOLD, BITCOIN EURGBP continues to be suppressed during February. Will it rise again? Weekly Market Wrap With Gary Thomson: S&P 500, CAD, GBP/USD, AMZN

Latest articles

Forex Analysis

Exchange Rates Consolidate at the Beginning of the Week

Trading participants continue to evaluate the prospects for a change in the US Federal Reserve's monetary course against the backdrop of the publication of the minutes of the January meeting. Officials reiterated their cautious stance on lowering borrowing costs and,

Financial Market News
Forex Analysis

The US Continues to Trump the Euro Economy on Key Metrics, But What Is Next?

A clear measure of public confidence in a national economy, as well as the ability to access a key component of it, is how many new homes are being sold compared to previous months. There are a number of important

Forex Analysis

NZD/USD Technical Analysis: Bearish Start To News-heavy Week

After 8 consecutive days of growth, the price of NZD/USD is forming a bearish candle this morning, thereby indicating possible concerns among market participants at the beginning of a week full of important economic news: → On Wednesday, at 4:

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 65.68% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.