USD made a massive and a staggeringly move last night in just a few hours when FED released it FOMC Meeting Minutes that did not use the word, “Patient” after a long time. GBPUSD shot up 500 pips then it fell down 400 pips in just a few hours. EURUSD also shot up more than 500 pips and then fell down. Just imagine how much the market volatility there was last night.
The dollar has made a staggering round trip following yesterday’s Federal Reserve statement. To get you up to speed fast, the Fed removed the word “patient” from its statement as everyone expected. But the new projections about the pace of tightening and comments from Janet Yellen caused the market to interpret the announcement as overall dovish. Rate hikes are now seen as starting later and going slow.
So what did happen last night? Last night when FOMC Meeting Minutes were released, it removed the word patient and for the first time since 2008, an indication was made that the interest rates would be increased sometimes in the coming months but not in April. Market has been expecting an interest rate increase in the this FOMC Meeting. When the minutes made it clear that the interest rate hikes will not take place in April but will happen later. USD fell down.
What this shows is how markets are ruled by Central Banks. With just one word, the Central Bank can move the markets upside down. This happened 2 months back also when the Swiss National Bank caused many bankruptcies in the market by removing the Swiss franc Euro peg. Whatever happened last night, though did not cause many bankruptcies as FED is a far more mature and experienced Central Bank as compared to the Swiss National Bank.
Market analysts were expecting a massive fall of EURUSD. Instead it first shot up 500 pips on the release of the minutes. Then in the next few hours, all the gains made by EURUSD in the last many months has almost been given up and EURUSD is trading almost where it was.
“Everybody was tripping over themselves calling for 80 cents on the euro. It’s natural for the dollar to pause here,” said Boris Schlossberg, partner at BK Asset Management. “I don’t think the dollar rally is over by any stretch of the imagination … could we go close to parity? Yes, but for now I think $1.05 holds.”
Now a strong USD is not good for American companies. A strong USD makes exports expensive. Companies like Oracle are already feeling the heat of strong USD. A strong USD is not what the FED wants. The FOMC made a nod to the dollar’s impact on the economy in its policy statement, noting that export growth has weakened. Yellen was more explicit in her press conference, saying that exports would be a “notable drag” on growth this year and tying that to the strength of the dollar, which she said partly reflected the strength of the U.S. economy.
So you can well imagine how difficult the job of a Central Banker is. So, as the dollar climbs higher and higher, we now hear some people ridiculously whispering about the Fed having to engage in further QE to bring the dollar back down. However, it is clear that these people are not burdened by the facts. Further QE will not impact the dollar, and the dollar is destined to higher levels later this year no matter what the Fed does or does not do.