US Open Note – FOMC hangover supports dollar as euro and gold dig lower; BoJ rate decision ahead

FOMC triggers much awaited volatility

After a period of calmness, the upward revision in the FOMC rate projections displayed in the long-awaited dot plot came to shake the waters late on Wednesday, reviving the rally in global bond yields and of course amplifying the buying confidence in the dollar.

In fact, investors had pretty much acknowledged that the monetary policy in the US will be a one-way path to tightening in the coming years even before the hawkish announcement. However, what was still uncertain was the timeline of the stimulus reduction, and the dot plot has now shed some light into that question, showing a median projection of two rate hikes by 2023 from none in the March meeting.

Of course, the dot plot is not concrete guidance of what the Fed will actually do in the coming years as interest rates are scheduled to remain steady until the central bank meets its dual employment and inflation mandate. Still, with several policymakers shifting to the hawkish side this month, monetary tightening will definitely be a hot topic in the year ahead, unless the pandemic drama returns.

Of note, the Fed has also revealed that bond tapering discussions are in progress, making an official announcement of the action possible at the September meeting, while investors are also confident that the Jackson Hole symposium in August will likely provide a notice in advance. The significant upside revision in inflation projections and the cautious comments on the inflation surge was another turning point in the Fed’s communication.

Dollar takes it all

The FOMC hangover continued Thursday, sending the dollar index to a fresh two-month high of 91.80 during the European session as the euro was struggling to find any footing near $1.1940. The common currency was the biggest victim of the dollar boost after the swiss franc and gold, with the latter eyeing another sharp decline towards the $1,760 – $1,760 support region after failing to rebound near $1,800.

On the other hand, the decline in pound/dollar was more conservative but strong enough to push the price slightly below a tough ascending trendline and to an almost six-week low of 1.3933. UK retail sales for May could be the next catalyst for the pair on Friday at 06:00 GMT, likely proving whether the sell-off could be a one-off incident or the start of a new bearish cycle ahead of the BoE policy meeting next week.

As regards stock markets, European equities are heading for a soft negative close, while US stock indices started Thursday's session with marginal losses.

Bank of Japan reviews policy; US Jobless claims dissapoint

In other central bank news, the Bank of Japan (BoJ)  will conclude its two-day policy meeting overnight, though as usual no fireworks are expected. Unlike other key developed economies, Japan is not part of the inflation story as prices continue to move at a negative rate despite the massive stimulus. Hence, with the central bank lagging well behind its objectives, monetary policy will likely remain at current levels for a while.

Besides these drawbacks, the vaccination program is hard to be proud of as well. Given the tiny share of vaccinated people in the country and the upcoming Olympic games in Tokyo, the economy could face another Covid outbreak. Japan’s Prime minister announced the lifting of some restrictions as of June 20 but urged people to watch the Olympic games on TV in order to keep hospitalizations under control.

As for the market reaction, the safe-haven yen will likely shrug off the BoJ event, remaining exposed to the dollar factor. Still, worse-than-expected US weekly jobless claims managed to bring some relief to the currency, pressing dollar/yen to an intra-day low of 110.36.

In other data releases, New Zealand's GDP growth figures will be watched later today at 22:45 GMT.

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