Dollar bounces back after Fed announcement

 Dollar bounces back after Fed announcement

Dollar bounces back after Fed announcement.

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The dollar eased last night against major currencies, as the US Federal Reserve made a significant monetary policy announcement. However, on Thursday it rallied since the decision was already priced in.The Fed finally unveiled its plan to slow its huge bond-buying programme which was introduced at the start of the pandemic. However, interest rates remain unchanged and the Fed has still referred to inflation as ‘transitory’. Although there was a recognition that supply chain issues could last into the new year.

Tapering will begin next month and there will be a total reduction of $15bn per month in asset purchases. Notably, there was also an indication that the taper strategy would not be changed due to the potential impact it may have on markets. This differs from an earlier stance where the Fed mentioned that they could be flexible with tapering.

As a result of this announcement, the stock market reacted with three indexes hitting new all-time highs. Meanwhile, the greenback saw some weakness against major currency pairs. Recently, the Reserve Bank of Australia and the European Central Bank also pushed back against monetary tightening. The Bank of England is set to meet later today. Investors will be watching these policy decisions closely to get a sense of the tone.

Inflation is proving to be stubborn in many countries across the world, as supply chain disruption continues. The key question will be how long this inflation lasts, and if rate hikes may become a necessity rather than an option. Central banks are wary of stifling economic recoveries from the pandemic.

This is how the dollar fared against major currencies at the time of writing (12:30 pm):

DXY bounced back from earlier lows and was trading around 94.2

EUR/USD was trading around 1.54 after falling back from gains made on Wednesday

GBP/USD was trading at around 1.36 with markets anticipating the BOE meeting

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