The Canadian dollar rallied following the meeting of the U.S. Federal Open Market Committee. The FOMC was as dovish as expected, leaving interest rates and monetary policy unchanged.
The statement acknowledged improving economic indicators but countered them by noting, "the sectors most adversely affected by the pandemic remain weak."
The Fed stressed that "For the economy as a whole, employment is 9.5 million below its pre-pandemic level."
The statement reaffirmed that U.S. interest rates would remain unchanged saying, "With regard to interest rates, we continue to expect it will be appropriate to maintain the current 0 to 0.25% target range for the federal funds rate until labor market conditions have reached levels consistent with the Committee’s assessment of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time. I would note that a transitory rise in inflation above 2%, as seems likely to occur this year, would not meet this standard."
Bond traders appear to be pushing back against the Fed's view. U.S. Treasury yields have climbed steadily over the past several weeks and reached 1.745% today.
It seems that traders believe that the two rounds of Fed stimulus since December will lead to a sharp rise in inflation. They may try to drive yields high enough to force the Fed to react. Only time will tell.
EUR/USD climbed from a pre-FOMC level of $1.1904 to $1.1986 overnight and is now trading at $1.1940 in New York. However, the topside may be limited due as the Eurozone is suffering from a "third-wave" COVID-19 outbreak.
GBP/USD rallied from $1.3850 to $1.4000 following the Fed meeting. Prices are just below the peak ahead of the Bank of England monetary policy meeting.
USD/PY churned inside a 109.30 to 108.70 on Treasury yield price action. Traders are also cautious ahead of the Bank of Japan monetary policy decision tomorrow.
AUD/USD outperformed against NZD/USD. Australia’s employment report was better than expected, while New Zealand Q4 GDP was weaker than forecast.
The Canadian dollar will maintain its bullish bias thanks to firm oil prices and the U.S. stimulus program.
Today’s U.S. economic data includes Jobless Claims and the Philadelphia Fed Manufacturing Index.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
