Friday’s US GDP data will be significant for near-term dollar confidence with the potential for an important dollar index having been posted after the Fed statement.
The dollar index had edged higher into Wednesday’s Federal Reserve statement with resistance on approach to the 94.25 area.
As expected, the Federal Reserve Open Market Committee (FOMC) left interest rates on hold at the latest policy meeting with 9-0 vote to maintain the Fed Funds rate at 1.00-1.25%. The committee continued to see the economic risks as broadly balanced and there was optimism surrounding the labour market.
There was some increased caution surrounding inflation with comments that trends will be monitored closely even though the committee expected the inflation rate to rise to the 2% target over the medium term.
As far as the balance sheet is concerned, there were comments that the process of shrinking the balance sheet would start relatively soon.
The dollar came under renewed pressure following the release with markets seeing the release as slightly dovish with an initial focus on the inflation rhetoric.
The latest comments from ECB member Nowotny also put some upward pressure on the Euro with the potential for tapering from the end of 2017.
There was also evidence of bullish dollar positioning into the Fed statement with a reversal helping to trigger sharp losses.
There were important breaks of technical levels for major pairs which contributed to sharp losses in the dollar index. EUR/USD broke above August 2015 highs around 1.1710 which unleashed a fresh round of buying while AUD/USD broke above 0.8000 and USD/CAD declined to below 2016 lows.
Overall, the dollar index declined to fresh 13-month lows below the 93.20 level.
The dollar recovered some ground in Asia with some correction from oversold conditions and a reassessment of the Fed statement.
There was also some evidence that the capitulation of dollar longs and over-extended shorts had triggered the conditions for a sharp rebound in the US currency.
Thursday’s data releases had little overall impact with a strong headline durable goods orders release offset by only a slight underlying increase.
Overall, the dollar index recovered to the 93.90 area late in the European session.
US Dollar Index (DXY) 4-Hour Chart