Forex Today: US Dollar struggles to rebound as markets assess Fed announcements

Here is what you need to know on Thursday, May 2:

The US Dollar (USD) suffered large losses against its major rivals in the late American session on Wednesday as the Federal Reserve's (Fed) statement language and Chairman Jerome Powell's comments turned out to be not as hawkish as feared. Final revisions to HCOB Manufaturing PMIs for Germany and the Eurozone will be featured in the European economic docket. Later in the day, weekly Initial Jobless Claims and Unit Labor Costs data for the first quarter from the US will be watched closely by market participants.

The Fed left the policy rate unchanged at 5.25%-5.5% as expected. In its policy statement, the Fed acknowledged that there has recently been a lack of further progress toward the 2% inflation target. Regarding the quantitative tightening strategy, the Fed noted that they will slow the decline of the balance sheet by cutting the Treasury redemption cap to $25 billion per month from $60 billion starting June 1. In the post-meeting press conference, Chairman Powell refrained from hinting at the timing of a policy pivot but said that it was unlikely that the next interest rate move would be a hike. "To hike, we'd need to see evidence policy is not sufficiently restrictive -- that's not what we see," he explained.

After fluctuating wildly during the press conference, the USD Index turned south and lost over 0.6% on a daily basis on Wednesday. Early Thursday, the index moves up and down in a tight channel above 105.50. Meanwhile, the benchmark 10-year US Treasury bond yield stays in negative territory slightly above 4.6% and US stock index futures trade modestly higher.

US Dollar price this week

The table below shows the percentage change of US Dollar (USD) against listed major currencies this week. US Dollar was the weakest against the Japanese Yen.

	USD	EUR	GBP	CAD	AUD	JPY	NZD	CHF
USD		-0.11%	-0.17%	0.45%	0.05%	-1.82%	0.17%	-0.21%
EUR	0.11%		-0.03%	0.53%	0.16%	-1.70%	0.26%	-0.07%
GBP	0.18%	0.05%		0.59%	0.20%	-1.63%	0.32%	-0.04%
CAD	-0.45%	-0.54%	-0.60%		-0.40%	-2.23%	-0.29%	-0.65%
AUD	-0.05%	-0.14%	-0.20%	0.40%		-1.83%	0.11%	-0.23%
JPY	1.79%	1.66%	1.60%	2.19%	1.83%		1.92%	1.55%
NZD	-0.19%	-0.26%	-0.32%	0.27%	-0.12%	-1.96%		-0.34%
CHF	0.19%	0.08%	0.03%	0.62%	0.22%	-1.61%	0.34%

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).

Toward the end of the American session on Wednesday, USD/JPY fell nearly 400 pips in less than an hour. Although there is no official word yet, market participants see that move as a result of another intervention. After falling all the way to 153.00, USD/JPY recovered during the Asian trading hours and was last seen trading at around 155.50.

EUR/USD staged a decisive rebound on Wednesday and erased all of Tuesday's losses. The pair holds steady slightly above 1.0700 in the early European morning on Thursday.

GBP/USD spent the majority of the day below 1.2500 on Wednesday but closed above that level, supported by the USD weakness. The pair stays in a consolidation phase at around 1.2520 in the European session.

Gold benefited from the selling pressure surrounding the USD and retreating T-bond yields on Wednesday and settled above $2,300. XAU/USD struggles to preserve its bullish momentum and trades in the red slightly below $2,310 early Thursday.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

Share: Feed news

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.