Talking Points:- Federal Reserve policymakers forecast one to two rate hikes later this year.
- 2015 GDP forecast revised down to +1.8-2.0% from +2.3-2.7% in March.
- EUR/USD clears $1.1300 on policy statement; press conference at 14:30 EDT/18:30 GMT.
The Federal Reserve has released its June policy statement ahead of its press conference, and the impact is thus far resulting in a weaker US dollar. EUR/USD jumped over $1.1300 and USD/JPY slipped under ¥123.80 as the transitioning central bank lowered its 2015 GDP forecast and boosted its 2015 unemployment rate forecast, suggesting a slightly less optimistic outlook among policymakers.
The changes in official forecasts ran somewhat counter to the policy statement itself, which noted improvements in the FOMC’s assessment of the state of the economy: in April, the statement said “that economic growth slowed during the winter months, in part reflecting transitory factors,” while in June, the statement read “that economic activity has been expanding moderately after having changed little during the first quarter”; and in April, the statement said “the pace of job gains moderated,” while in June, the statement read “the pace of job gains picked up.”
Ultimately, the statement in conjunction with the updated economic projections, it seems that the Federal Reserve is cautiously optimistic on the state of the economy, seeing the economy improving from the early-year rut but not at a quick enough pace to offset the decline in activity altogether.
This view is best encompassed by the updated (and infamous) dot plot projection, which showcases members expectations for interest rates at various points in the near-future. When viewed in aggregate, market participants can get a sense of where the Federal Reserve sees rates in the future – thereby helping project an expected rate hike timeline.
Federal Reserve policymakers are overwhelmingly in favor of raising rates for the first time in 2015, with members in favor by a margin of 15-2. However, the magntitude of rate hikes is where the committee differs: members are split on whether or not there should be one or two rates hikes in 2015.
EUR/USD traded volatilely around the initial announcement, ranging between $1.1203 and $1.1298 in the initial moments of the release. Ultimately, with market participants focusing on the downgraded economic forecasts – and not the dot plot projection updates, which saw US Treasury yields push higher – EUR/USD sustained its gains heading into Federal Reserve Chair Janet Yellen’s press conference, trading at $1.1290 at the time of writing.
--- Written by Christopher Vecchio, Currency Strategist