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FOMC Statement and the USD Reaction

The FOMC decided to hold interest rates at historic lows. This was expected. It also continued to taper its QE purchases by $10B/month, bringing down asset purchases to $15B/month. This was also in-line with expectations.

Q2 data have been much stronger than Q1 data, and today's advanced Q2 GDP report showed that. Q2 GDP grew at an annual rate of 4.0%, beating forecasts of around 3.1%. Q1 GDP was revised from a contract of -2.9% to -2.1%.

How did the FOMC address the improving data? It continued to talk up the economy, but noted that "even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run." (FOMC Statement).

This is somewhat a dovish statement because it downplays Q2's strong growth. The statement is not one of policy but one that seems to intentionally hedge the market's hawkish expectations. When you look at data alone, it is hard to imagine the Fed not raising rates if employment were to be back below 5% and inflation at or above 2.0%. 

Still, this non-hawkish FOMC statement could slow down USD's recent strength. It should not reverse it, but soem short-term consolidation is likely. The US Dollar Index pushed to new highs after the GDP data, but is held below 81.55 at the moment. The 1H chart shows a market that is reacting bearishly to the FOMC statement.

USDX 1H Chart (7/30)

While we should not anticipate a bearish reversal, we can expect some short-term consolidation with downside risk toward the 80.90-81 pivot seen in the daily chart:

USDX Daily Chart (7/30)

(click to enlarge)