U.S. Dollar (DXY) Rallies As Fed Stays Hawkish

Key Insights

• U.S. dollar gained additional upside momentum after the Fed Interest Rate Decision. 
• Treasury yields tested new highs. 
• The Fed looks ready to fight inflation at all costs. 

U.S. Dollar Index Tests New Highs

U.S. dollar rallied after the release of the Fed Interest Rate Decision. The Fed increased the target range for the federal funds rate to 3.0% – 3.25%, in line with the analyst consensus. The Fed noted that “ongoing increases in the target range will be appropriate.”

The Fed has also updated its economic projections, which differ materially from June projections.

The Fed expects that GDP will grow by 0.2% in 2022 and 1.2% in 2023. Back in June, the Fed projected GDP growth of 1.7% in both years. Unemployment Rate is expected to increase from 3.8% in 2022 to 4.4% in 2023, compared to the previous expectation of 3.9% in 2023. Put simply, the Fed expects that its aggressive rate hikes will hurt employment.

Importantly, the Fed has changed its median federal funds rate projections. The Fed believes that the federal funds rate will increase to 4.4% in 2022 and 4.6% in 2023. Previous expectations were 3.4% in 2022 and 3.8% in 2023.

The major change in Fed’s expectations boosted Treasury yields. Currently, the yield of 2-year Treasuries is trying to settle above the 4.10% level. The yield of 10-year Treasuries has recently made an attempt to settle above 3.60%. Higher Treasury yields and hawkish Fed may provide additional support to the American currency.

Currencies Drop To New Lows Against The U.S. Dollar

EUR/USD gained strong downside momentum and tested the 0.9815 level after the release of the Fed Interest Rate Decision. These levels were last seen back in 2002.

Meanwhile, GBP/USD declined towards 1.1250. The British pound has not been that weak since 1985.

Commodity-related currencies have also found themselves under strong pressure. AUD/USD declined towards 0.6620, while NZD/USD tested the 0.5850 level. USD/CAD settled above the 1.3400 level and moved towards 1.3440.

Not surprisingly, USD/JPY also managed to gain upside momentum and made an attempt to get to the test of the 145 level. At this point, the key question is whether the Bank of Japan is ready to defend this level or it will allow USD/JPY to settle above 145.

Traders should note that the Fed Press Conference starts soon, so markets will react to Powell’s words. At this point, the Fed’s commentary looks hawkish, which is bullish for the U.S. dollar. However, Powell’s comments may change the market’s mood, so traders should be prepared for fast moves.

For a look at all of today’s economic events, check out our economic calendar.