USD traded higher against all the major currencies on Thursday, recouping most of its post FOMC losses. The US Fed has no plans to raise interest rates until 2023. The USD recovery and rise in Treasury yields indicate that investors continue to believe in positive outlook of the economy.
Thursday’s strong rise in the Philadelphia Fed index reinforces the central bank’s upgraded economic projections. The Philly Fed measure jumped from 23.3 to 51.8, its best reading in 48 years. Month after month, investors have seen manufacturing drive the recovery and it won’t be long before services follow. The Fed can’t keep the USD down because vaccine rollout and stimulus checks will make for strong second quarter and second half recovery.
USD/JPY is at risk of a near term correction but analysts don’t expect the losses to last. The Bank of Japan (BoJ) has a monetary policy announcement and they are the only central bank that could change interest rate policy this week. BoJ is widely expected to widen the band that long term interest rates are allowed to move. Currently, rates are allowed to fluctuate within 0.2% band of their zero rate policy, but that could be adjusted to 0.25%. BoJ could also eliminate the numerical target for its bond buying program. Actions like these would make the central bank more conservatively dovish.
The recovery of greenback drove USD/CAD higher for the first time in 8 trading days. Canadian retail sales are due for release on Thursday. USD/CAD is deeply oversold, if retail sales surprises to the downside, investors could see a stronger recovery.
Bank of England (BoE) voted unanimously to leave monetary policy unchanged and like USD, GBP sold off after the rate decision. According to the policy statement, “The Committee does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.” This dovish outlook makes it clear that the central bank is not even thinking about raising interest rates. Although GBP/USD traded lower, GBP rose to its strongest level versus EUR in more than a year.