USD weakens after a dovish hike from the Fed

A “dovish hike” in March may be the Fed’s last 

• The Fed hikes by 25 basis points: The rate is now c. 5.00%, with hints that this could be the last increase. 
• USD weakness: The USD is underperforming on major forex pairs today.
• Equities fell on the Fed, but are trying to rebound: Wall Street fell into the close last night but US futures have picked up well overnight. Downside on European indices is being contained this morning. 
• A risk-negative bias drives gold higher: In commodities, gold is higher, whilst silver and oil are weakening.

A 25bps hike may be the last

The Federal Reserve has increased the Fed Funds rate by 25 basis points (bps) to 5.00%. However, this may be the last rate hike.

The FOMC statement and Fed Chair Powell delivered a few hints that reflected the newfound caution on the committee:

• The statement said that “some additional policy firming may be appropriate” – a change from the previous “will be appropriate”
• Powell talked about banking stress that could trigger a credit crunch that has a “significant macroeconomic effect and we would factor that into our policies.”

Economic projections and “dot plots” are very similar to December

Another interesting takeaway was that there were very few changes to the economic projections or the members’ expectations of future interest rate moves (the “dot plots”).

• The biggest change was a downgrade to GDP growth expectations for 2024

• Other than that there were minor tweaks here and there for inflation and unemployment.

However, from December to March, there has been no increase in the median expectation of where rates will end the year in 2023.

Just two weeks ago, the reading would have been dramatically higher, but the banking crisis has changed this.

With Powell’s caution over the impact of the banking crisis on the economy, the focus seems to now be turning away from inflation.

With no shift higher in the dot plots, this suggests that the Fed is now likely to pause.

Markets are positioned that the Fed is now done

There have been a string of market responses to suggest that the Fed is now done:

• The yield on 2-year Treasuries fell decisively back below 4%.
• According to the CME Group FedWatch tool, the probability of another hike in May has fallen to around 44% - so is now unlikely. 
• Fed Funds futures still see the peak around 5.00% but also have brought the first potential rate cut forward to potentially September.

USD falling in a dovish reaction

So with this “dovish hike”, we have seen the USD come under selling pressure. The safe haven of gold also rallied.

This has also come at the same time that equities also fell on Wall Street. However, this can be attributed to an announcement by US Treasury Secretary Yellen announcing that they were not looking to extend the insurance to cover US banking deposits above $250,000.

EUR/USD

The pair has been trading in a medium-term range of around 550 pips between 1.0480/1.1030 since early December.

However, the outlook is strengthening:

• Near-term momentum has turned strongly positive with the RSI into the mid-60s.
• A move through resistance at 1.0800 has now opened a test of the 1.1033 February high.

There is now a pivot band between 1.0700/1.0800 to use as good support for any near-term corrections. 

A move above 1.1033 would continue the medium-term recovery since October and open 1.1185 as the next resistance.

Gold (XAUUSD)

Gold has been pulling back from the $2009 high in recent days. However, the bulls are now regaining control again.

• Rebounding from $1934 means that the support band between $1928/$1960 has held firm.
• Momentum is strong with the RSI in the mid-60s – this suggests that weakness is a chance to buy.

A retest of the high at $2009 is looking likely once more.

A breakout opens the big resistance towards the all-time highs between $2070/$2075

Support at $1934 will grow in importance, but it would need a move below $1885 to abort the bullish medium-term outlook.

Support and resistance levels for Forex, Commodities, and Futures/Indices

Data: MT5/IXOne

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