3 Reasons Why Dollar Sold Off Post FOMC
Daily FX Market Roundup 07.28.2021
By Kathy Lien, Managing Director of FX Strategy for BK Asset Management
The U.S. dollar traded lower against most of the major currencies on the back of the Federal Reserve’s monetary policy announcement. EUR/USD rose to its strongest level in nearly 2 weeks while USD/JPY dropped back below 110. Interestingly enough, Fed Chairman Powell did not appear overly concerned about Delta.
In the press conference he said, “What we’ve seen is with successive waves of COVID over the past year and some months now, there has tended to be less in the a way of economic implications from each wave. We’ll see whether that is the case with the delta variety. But it’s certainly not an unreasonable expectation.”
This implies that policymakers will watch virus trends carefully but there’s no immediate cause for alarm or shift in expectations for taper. Barring a return to a complete lockdown, the Fed will continue their discussions on reducing asset purchases later this year.
The FOMC statement contained a few changes, none of which were extremely market moving. The Fed took out the line about vaccinations reducing “the spread of COVID-19” in the U.S. but also the word “significantly” from the sentence about the “path of the economy” continuing to “depend on the course of the virus.” This slightly less pessimistic outlook should have been positive for the dollar but the greenback sold off when Powell made it clear that while timing is being discussed, it could be months before an official announcement is made. Investors sold dollars for the following reasons:
1. Fed Downplayed Inflation Rise – Powell admitted that inflation is higher than expected but called for a bit of patience because he still believes price pressures will fade and most of the recent increases by businesses are one-offs.
2. Made No Decisions on Taper Timing – While Powell said the Fed took their “first deep-dive” on how to scale back bond buying, no decisions about the timing of taper were made. He added that ideally you would not raise rates before you taper and they are still a ways away from considering raising interest rates
3. Said No Substantial Further Progress has been Made – Pointing to the millions of people still unemployed, Powell stressed that the economy is still a good deal away from making substantial further progress towards stable prices and maximum employment.
The main takeaway from today’s FOMC is the central bank remains cautiously optimistic and in no rush to reduce asset purchases. They gave investors very little confidence that a signal to reduce bond buying would come in August. With the uncertainty of the Delta variant in the U.S. and abroad, they’ll watch how the situation progresses and make a decision on whether to delay a signal when the time comes next month.
This is a wise choice considering that states and businesses are beginning to respond to the Center of Disease Control and Prevention’s recommendation for masks in states with high virus rates. Just today, Nevada reinstated a mask mandate in Las Vegas and other high transmission areas, Kansas City brought back their mandate and Apple said they will be asking all staff and shoppers to wear masks at most stores regardless of vaccination status. Mask mandates wont curb economic activity but if more shoppers are spooked by the Delta variant, the pace of recovery could slow. Stocks pulled back for the first time in 7 trading days – Delta virus concerns means more losses are to follow, which could translate into gains for the Japanese Yen and Swiss Franc.