Summary:

• FOMC left rates unchanged, but moved the dollar
• The currency extended losses to its major peers
• Many currency crosses hit mulit-year highs after the decision and more gains could come

Analysis:

The dollar extended its decline as traders in Asia joined the selloff after the U.S. Federal Reserve indicated that a period of weak inflation continues and left rates on hold. What’s important, the FED’s statement was seen as dovish as it not only indicated that inflation has weakend recently, but also consumer speding was soft. 

 While the Fed said it expected to start shrinking its massive holdings of bonds “relatively soon”, a phrase taken by many to mean an announcement in September, the central bank also noted weakness in U.S. inflation more explicitly than before. That recognition of soft inflation from the Fed, which had in the past judged the weakness as transitory, added to expectations that the Fed’s plan to raise interest rates a third time this year might be delayed.

Chances of a third rate hike this year have fallen below 40%, hurting the US dollar. source: Bloomberg

Although the dollar had been supported by the Fed’s gradual policy tightening since late 2015, its perceived interest rate advantage is eroding as many other central banks have started to look to wind back their stimulus in recent months. European Central Bank President Mario Draghi signaled in June that it could tweak its asset purchases, prompting investors to flock to the euro. What’s more, Nowotny’s hawkish speech from yesteday also supported the euro. Looking at the technical situation one should expect continuation of the recent rally, with the first stop at 1.1800. The pair has broken above the crucial resistance, so more gains could come in the shor-term. 

 A break above 1.1700 indicates that the long-term consolidation could be over. If so, it could be just a beginning of the EURUSD rally.

What’s more, the Austrailian dollar has this morning lifted above 80 US cents for the first time in more than a year. That was quite the turnaround for the Australian dollar, having fallen as low as 0.7880 at one stage yesterday following the release of weaker-than-expected inflation data. The question on the lips of many investors now will no doubt be where next for the Australian dollar? Looking at the chart we may notice that the AUDUSD has reached 0.8050, an important level of resistance. A break higher would open a way toward 0.8150, but a short-term downward move shouldn’t be ruled out. However, a break from the long-term consolidation has its target at 0.8500, so any correction should be used to join the upward trend.

 AUDUSD has broken from the long-term consolidation, so a move towards 0.8500 should be expected.