US dollar falls in initial Fed hike reaction

2023年5月3日

• FOMC raises interest rates by 25 bps as expected, unanimous decision
• Policy statement no longer says “some additional policy firming may be appropriate”
• Dovish hike, but was it expected?

So, there you have it then: the Fed hikes by 25 basis points as had been highly anticipated. But by removing a key line from the statement that “some additional policy firming may be appropriate” is a dovish move by the central bank. The key question is this: Was this expected by the markets already? Well, the initial reaction saw the US dollar fall and gold hit a new high on the week, before the moves started to unwind a little. All eyes will be on Powell at the FOMC presser, due to start shortly. If the Fed Chair sounds more dovish than in his recent remarks, then this will be the green light the dollar bears would be looking for.

But whatever the Fed chair says, it is all about what the markets think of it. The reaction to the FOMC statement and press conference is always more important than the news itself. With that in mind, keep an eye on closing prices or levels on major asset classes. A bearish close for the dollar could, for example, set the stage for gold to embark a continuation of its rally to a new all-time, while a bullish close could see the USD/JPY break out to a fresh multi-week high as we head towards the business end of the week.