Dollar retreats despite hawkish Fed, eyes on BOE

Risk flows dominated the financial markets in the second half of the day on Wednesday despite the US Federal Reserve’s hawkish policy outlook. The US Dollar Index, which fell 0.6% on Wednesday, stays relatively quiet early Thursday as investors await EU inflation report, Bank of England’s (BOE) rate decision and mid-tier data releases from the US. Meanwhile, the market mood remains mixed amid contradicting headlines on the Russia-Ukraine conflict.

The Fed increased its policy rate by 25 basis points following its two-day meeting in a widely expected decision. The Summary of Economic Projections, the so-called dot-plot, revealed that policymakers were expecting six more hikes this year with the policy rate hitting 1.9% by the end of 2022 before rising to 2.8% by the end-2023. Although the initial market reaction caused US T-bond yields to push higher and helped the dollar gather strength against its rivals, FOMC Chairman Jerome Powell’s remarks soothed markets.

Powell said they were still expecting inflation to come down in the second half of the year despite heightened uncertainty and reassured markets that they will tackle inflation without hurting the economic activity. “We are strongly committed to not allowing high inflation to become entrenched,” Powell noted. “The good news is that the economy and labor market is quite strong, can handle interest rate increases.”

Federal Reserve hikes 0.25%, cautious on balance sheet and economic growth.

The Financial Times reported late Wednesday that Ukraine and Russia had made significant progress towards a potential peace plan. This headline revived optimism for a ceasefire but the Ukrainian side has reportedly rejected the proposed neutrality. Moreover, several reporters noted that Ukraine saw the positive shift in Russia’s tone as an attempt to ease the sanctions’ pressure.

EUR/USD closed the second straight day in positive territory on Wednesday but struggled to clear 1.1050. The pair trades in a relatively tight range near 1.1030 early Thursday.

GBP/USD extended its recovery after breaking above 1.3100 and clings to small daily gains above 1.3150 in the European morning. The BOE is expected to hike its policy rate by 25 basis points later in the session.

Fueled by surging US Treasury bond yields, USD/JPY reached its highest level in six years above 119.00 on Wednesday. The pair retreated during the Asian trading hours but seems to have settled above 118.50.

Gold dropped below $1,900 for the first time in March with the immediate reaction to the Fed’s policy statement on Wednesday. XAU/USD, however, managed to reverse its direction during Powell’s presser and continued to push higher during the Asian session. The pair was last seen clinging to modest daily gains above $1,930.

Bitcoin capitalized on the risk-positive market environment and reclaimed $40,000 late Wednesday. BTC/USD stays in a consolidation phase near $41,000 early Thursday. Ethereum gained nearly 6% on Wednesday and was last seen fluctuating in a tight range above $2,700.

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