- Fed suggests rates will be higher for longer.
- European central bank actions cause some surprises.
- US dollar rallies across the board.
USDCAD open: 1.3492-96, overnight range: 1.3453-1.3511, close 1.3461, WTI $88.80, Gold, $1922.89.
The Canadian dollar tanked on the heels of a more hawkish-than-expected FOMC decision.
The Federal Reserve lived up to its advanced expectations and implemented a policy characterized as a "cautious pause with hawkish undertones." This entails maintaining the current interest rates while issuing a cautionary note about the possibility of rate increases later in the year. The term "hawkish" is applied because the Fed's statement described economic activity as robustly expanding, a notable contrast to the earlier assessment in July when the economy was deemed to be growing at a more moderate pace.
This "hawkish" stance is supported by the Summary of Economic Projections. In July, policymakers indicated that they had likely completed rate hikes, but the projections for September suggest the possibility of another 25 basis point increase before the year's end. During his press conference, Mr. Powell confirmed this expectation in response to a question.
Fed officials are anticipating a lower unemployment rate (3.8% compared to June's 4.1%), higher inflation (PCE at 3.3% versus 3.2% in June), and more robust economic growth (2.1% compared to June's 1.0%).
In his opening statement at the press conference, Mr. Powell reiterated these points, emphasizing that the current monetary policy stance is considered restrictive. He also cautioned that the Fed is ready to raise rates further, if necessary, with the caveat that such decisions will be made based on incoming data and their impact on the economic outlook.
The Fed decision made Canadian dollar traders forget all about the domestic interest rate implications from Tuesday's higher-than-expected inflation reading.
Overseas, central bankers were out in force. Sweden's Riksbank left its key interest rate unchanged while Norway's Norges Bank hiked its benchmark rate by 25 bps. Analysts are thinking that the Riksbank has reached the end of its rate hiking cycle while the Norges Bank indicated another rate increase was likely.
The Swiss National Bank (SNB) left its overnight rate unchanged and said previous rate hikes were countering inflationary forces.
EURUSD chopped about in a 1.0617-1.0665 range due to broad US dollar strength.
GBPUSD got crushed and fell to 1.2243 from 1.2356 in the wake of the Bank of England's decision to leave its overnight rate unchanged at 5.25%.
USDJPY is choppy in a 147.74-148.46 range as fears of BoJ intervention overshadow higher US Treasury yields.
AUDUSD traded defensively in a 0.6401-0.6455 band following the FOMC decision.
Today's US data includes weekly jobless claims (forecast 225,000) and the Philadelphia Fed Manufacturing Survey.
