Dollar Softer Following Fed's March Policy Decision

Above: File image of Federal Reserve Chairman Jerome Powell. Image © Federal Reserve.

The Dollar was broadly lower after the Federal Reserve said it still expects to cut interest rates three times in 2024.

The Pound to Dollar exchange rate rose half a per cent and extended gains into Thursday to the cusp of 1.28 after investors expressed relief that the Fed had not lowered the expected number of rate cuts in 2024 in light of strong economic and inflation data.

The Fed's dot plot chart shows policymakers remain of the view that three rate cuts will be appropriate this year despite also releasing upgraded GDP prints and PCE inflation prints.

Above: The market is no longer at odds with the Fed's own expectations for the future of the U.S. interest rate path.

The Dollar strengthened into the March policy decision amidst speculation that the Fed would once again lower rate cut expectations after the stronger-than-expected inflation readings for January and February.

The Fed raised its median GDP projection for end-2024 from 1.4% to 2.1% and the PCE inflation outlook was raised by 0.2pp for 2024.

No meaningful adjustments were made to the Fed’s communication, prompting markets to pare the Dollar's recent advances. This reaction is fully consistent with the base case predictions laid out in our Fed preview piece.

"Powell did acknowledge that the stronger-than-anticipated inflation readings for January and February constituted bumps in the path toward the 2% target and that policymakers need to see more data to gain greater confidence in a sustained return to target," says BCA Research.

"Our interpretation is that Chair Powell and a narrow majority of the Committee feel strongly about not delaying cuts for too long and are targeting the June FOMC meeting for the first cut," says Jan Hatzius, an economist at Goldman Sachs.

Above: GBP/USD at 30-minute intervals showing the post-Fed reaction. Track GBP/USD with your own custom rate alerts. Set Up Here 

Foreign exchange markets are highly attuned to central bank interest rate policy, with the Dollar rallying in 2024 as markets realise the Fed won't deliver nearly as many rate cuts as was expected in late 2023.

But, this pro-USD repricing in expectations has run its course in light of the Fed's most recent guidance, lowering volatility in the FX market and helping currencies such as the Pound advance against the Dollar.

"The key question heading into the March FOMC meeting today was how the Committee would react to the firmer January and February inflation data," says Hatzius.

"Our interpretation is that Chair Powell and a slight majority of the FOMC feel strongly about not delaying cuts for too long and are targeting the June FOMC meeting for the first cut. In fact, the new, somewhat higher inflation forecast - which is now 0.2pp above our own forecast of 2.4% - lowers the bar slightly for incoming inflation data to meet the FOMC’s expectations and keep a June cut on track," he adds.