The Fed made no changes to interest rates, in line with consensus forecasts.

The Federal Reserve reiterated the commitment to getting inflation above 2.0% to raise the average and forecast no increase in the Fed Funds rate until at least the end of 2023. The dollar secured limited gains despite the underlying dovish tone with no formal policy changes and a further unwinding of short dollar positions.

EUR/USD traded below 1.1800 as the Euro faded on the crosses.  Risk appetite faded with a very dovish Fed stance priced in and reservations over the underlying global recovery path. Sterling posted net gains on hopes for possible Brexit concessions and a correction from sharp losses.

US retail sales increased 0.6% for August following a downwardly-revised 0.9% increase the previous month and below expectations of 1.0%. Underlying sales increased 0.7% and below consensus forecasts of 0.9% while the control group recorded a 0.1% decline. The data maintained reservations that the economic recovery was slowing. EUR/USD was subdued in early US trading with a dip to near 1.1800 before settling around 1.1840 ahead of the Federal Reserve policy decision.

The Fed made no changes to interest rates, in line with consensus forecasts, while bond purchases will continue bond purchases at least at the current rate. According to the statement the on-going public health crisis will pose considerable risks to the economic outlook over the medium term even though conditions have improved.

The committee will seek a 2% inflation rate over the medium term and will aim for a rate moderately above 2% for some time so that inflation averages 2% over time. There was a 7-2 vote as Minneapolis President Kashkari wanted a sustained increase in core inflation above 2% while Dallas head Kaplan wanted greater flexibility.

The median dot plot of individual fed funds rate forecasts recorded no increase in rates in the 2021-23 period, although four committee members did expect rates to increase in 2023. The 2020 GDP decline was revised down, although 2021 and 2022 forecasts were lowered. There was choppy dollar trading following the statement.

Powell reiterated that there were important changes to the statement. Inflation was running below the Fed’s objective and a full economic recovery is unlikely until people are confident to engage in activities. The overall stance and rhetoric was notably dovish although there was no move to introduce yield curve control and Powell was slightly more optimistic over the outlook.

The US currency regained some ground following Powell’s comments and EUR/USD settled around the 1.1800 area. The dollar secured further support in Asia on Thursday with EUR/USD retreating to near 1.1750 amid further covering of short US positions before rallying to 1.1770.

There were dollar losses after US retail sales release with USD/JPY sliding below the 105.00 level for the first time since the end of July and lows around 104.80.

The Federal Reserve statement reinforced expectations that real interest rates will remain negative for an extended period which is liable to discourage capital flows into US fixed-income assets and hedging ratios are also likely to remain low which will curb underlying US currency support.

US equities initially held gains following the Fed statement, but there was selling pressure into the close and USD/JPY settled around the 105.00 level. Markets will continue to monitor fiscal developments in Congress and the Administration amid an increase in economic and political pressure for a further support package.

The Bank of Japan made no policy changes at the latest policy meeting, in line with expectations, while the economic assessment was revised up. Economy Minister Nishimura stated that new Prime Minister Suga had instructed the department to take steps without hesitation to support the economy. USD/JPY stabilised just above 105.00 while the yen made further net gains on the crosses. Markets will remain on alert for verbal intervention from Japanese officials if USD/JPY slides below 105.00.

Sterling held firm in early Europe on Wednesday and gradually gained traction during the day despite underlying unease over fundamental developments.

EU Commission President Von der Leyen again called on the UK to respect the Withdrawal Agreement. Later in the day there were reports that the government was planning fresh safeguards in the Internal market Bill in an attempt to appease Conservative backbenchers.

Concessions would improve the potential for passing the legislation, although there will still be major concerns from the EU side and US warnings also increased.

There was a solid tone in risk appetite which helped underpin sentiment. GBP/USD strengthened to the 1.3000 area while GBP/EUR rallied towards 1.0990. The Bank of England is not expected to change monetary policy at Thursday’s meeting and the statement will be watched closely for hints on potential action later this year.

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