$MCADE presale is now live!

Dovish FOMC statement not enough to reverse the dollar’s strength

By:
on Nov 3, 2022
Listen to this article
  • Despite a dovish FOMC statement, the dollar rallied as Powell downplayed the hopes for a pivot
  • US stocks dived as the Fed's policy becomes even more restrictive
  • The tightening cycle to continue as the Fed does not think it is over-tightening

As expected, the Federal Reserve of the United States (Fed) hiked the funds rate by 75bp yesterday. Investors focused on both the FOMC statement and the press conference, as they often trigger different market reactions.

Indeed, this was the case again.

Are you looking for fast-news, hot-tips and market analysis? Sign-up for the Invezz newsletter, today.

In the last weeks, the market participants increased their bets on a Fed pivot. As such, stocks rallied hard from their lows.

They rallied even more after yesterday’s FOMC statement. The reason was that the statement was dovish, implying that the Fed needs some time to assess the effects of the rate hikes on inflation.

However, all gains and some more were quickly reversed once Fed’s Powell started the press conference. Stocks dived, and the dollar rallied as investors betting on the Fed to pivot were forced to cover their positions.

The most contractionary Fed policy in 40+ years

With this new rate hike, the funds rate has reached 4% – a 40+ year high. The dollar, therefore, was supposed to rally, but the rate hike wasn’t quite news to financial markets.

It was priced in.

Yet, the dollar rallied hard, as it caught many market participants by surprise. Indeed, the FOMC statement was dovish, but the press conference was hawkish, as the Fed made it clear it is now done with the rate hikes.

The most contractionary Fed policy in 40+ years

With this new rate hike, the funds rate has reached 4% – a 40+ year high. The dollar, therefore, was supposed to rally, but the rate hike wasn’t quite news to financial markets.

It was priced in.

Yet, the dollar rallied hard, as it caught many market participants by surprise. Indeed, the FOMC statement was dovish, but the press conference was hawkish, as the Fed made it clear it is now done with the rate hikes.

The Fed doesn’t think it has over-tightened

During the press conference, the message sent by the Fed’s Chair, Jerome Powell, was totally opposite to what the statement said. In the statement, the FOMC members signaled that the Fed would take into account the cumulative tightening of monetary policy and the lags with which the rate hikes impact economic activity and inflation.

But during the press conference, Jerome Powell made it clear that the Fed is not done tightening. As such, buyers emerged after the initial dollar weakness,  and the greenback closed at its daily high.