The Federal Reserve's policy committee decided to keep its interest-rate target unchanged yesterday and expressed confidence in the ongoing strength of the economy. They conveyed a hawkish message regarding the near and medium term.
Both the Summary of Economic Projections and Fed chair Powell's press conference suggested a "higher for longer" rate regime ahead. This reflects the surprising strength of economic growth and lower unemployment compared to what the Fed and most experts anticipated, despite raising interest rates 11 times since March last year.
Officials expect one more small interest rate increase by the end of 2023, which is the same as what they predicted in June. There are two more meetings of the Federal Open Market Committee this year, one in November and another in December.
The most significant change in forecasts relates to interest rates for 2024. The median projection now indicates that the fed-funds rate will reach 5.1% by the end of next year. This is a half-point increase from what was predicted in June and just a quarter point below the current rate.
The "higher for longer" paradigm was reflected in the US 10-year real yield which appreciated and is now trading at 2.08% (top candlestick chart). Importantly, the real yield's trend-following indicators – the green 5-day EMA and the orange 10-day EMA – are trading in a bullish formation. This is supporting the dollar.
FXCM's USDOLLAR basket also increased yesterday and charted a bullish hammer (red arrow). This shows that the bulls took control, particularly after the press conference started.
The correlation coefficient (bottom indicator) between the real yield and FXCM's USDOLLAR basket is a robust 82%. This implies that as long as the "higher for longer" theme is reflected in the real rate, it is quite likely that the dollar will continue to be supported.
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.