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DXY Drops Following Dovish 75 bps Fed Rate Hike, GBP/USD Hits Monthly Highs in mid-1.21s

By:
Joel Frank
Published: Jul 27, 2022, 20:55 UTC

Fed Chair Powell’s less hawkish than feared tone on the economy and outlook for further hikes weighing on the buck.

Dollar

In this article:

Key Points

  • The US dollar was hit on Wednesday by a not as hawkish as feared Fed meeting.
  • The central bank raised interest rates by 75 bps as expected but acknowledged recent economic weakness.
  • EUR/USD rebounded to the 1.0200 area and GBP/USD to fresh monthly highs in the 1.2150s.

Buck Slides as Markets Pare Fed Tightening Bets

The US Federal Reserve raised interest rates by 75 bps to 2.25-2.50% target range on Wednesday as a majority of market participants had been expecting, bringing interest rates back above their pre-pandemic levels and roughly in line with the so-called “neutral rate” that neither stimulates nor slows the economy.

The Fed reiterated its stance that, given the backdrop of inflation running well above its 2.0% target, it still intends to lift interest rates into so-called “restrictive” territory in the coming quarters. Fed Chair Jerome Powell reiterated the Fed’s intentions to take interest rates above 3.0% by the end of the year in the post-meeting press conference.

While Powell was keen to emphasize that the Fed intends to continue taking things meeting-by-meeting and remaining “nimble” to economic developments, he acknowledged recent economic weakening as seen primarily in consumption and consumer sentiment, though also more recently cropping up in business sentiment/activity data.

Moreover, when pressed to comment on money markets that are pricing in Fed rate cuts in 2023, Powell refused to push back against expectations for easier policy next year. Markets thus interpreted the meeting as dovish, or at least, not as hawkish as feared.

Investors began paring Fed tightening bets, with another 75 bps rate hike in September now seen as a 50/50 rather than the probable outcome prior to the meeting. As a result, the US dollar, which has been propped up substantially so far in 2022 by the Fed’s relatively more hawkish stance versus most of its major peers, fell.

The DXY was last changing hands below the 106.50 mark, having dropped about 0.7% on the day. The index has now given back all of its Tuesday gains that were spurred by euro weakness on energy crisis-induced Eurozone recession concerns.

Data that showed a sharp drop in the size of the US trade deficit in June amid a surge in exports and stronger than expected core durable goods orders figures failed to prevent the slide, even though they contributed to a slight lessening of US recession concerns.

EUR/USD Recovers to 1.0200, GBP/USD Hits Fresh Monthly Highs in the 1.2150s

As a result of the weaker buck, EUR/USD rallied about 0.8% back to near the 1.0200 level, where it is once again testing its 21-Day Moving Average. GBP/USD jumped 1.0% to the 1.2150 area and printed a new monthly high, with the bulls now eyeing a test of the 50DMA and a downtrend that has been in play since February.

The only very muted drop in longer-term US bond yields, which initially fell after the Fed’s policy announcement, but have since risen again amid a pick-up in inflation expectations, means that USD/JPY was unable to break substantially lower. The pair was last trading around 136.50, only down about 0.2% on the day, with the market’s risk-on mood also preventing the safe-haven yen from getting much traction.

Risk-sensitive G10 currencies like the Aussie, kiwi and loonie all also performed well. A slightly larger than expected moderation in the QoQ rate of headline Australian consumer price inflation was offset by another big rise in the YoY rate, which supported RBA tightening bets and gave AUD/USD a modest overnight lift. US Q2 GDP growth figures will be the market’s main focus on Thursday.

About the Author

Joel Frank is an economics graduate from the University of Birmingham and has worked as a full-time financial market analyst since 2018. Joel specialises in the coverage of FX, equity, bond, commodity and crypto markets from both a fundamental and technical perspective.

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