The dollar jumped sharply overnight after the more hawkish then expected FOMC announcement. Dollar index rose to as high as 80.11, comparing to last week's low of 79.27 and is now trying to defend 80 handle. Treasury yield also responded positively with 30 year yield back at 3.67 and 10 year yield rose to 2.772. On the other hand, stocks responded negatively with Dow closed down -114 pts, or -0.7%. S&P 500 dropped -11.48 pts, or -0.61%. Gold seemed to have faced strong resistance below 1400 and extended its fall from recent high of 1396.2 to as low as 1326.1 so far. In the currency markets, the dollar is strongest against Canadian dollar which was evident in the strong break of 1.1223 key near term resistance level. Meanwhile, the next weakest were the Swiss Franc and Japanese Yen.
The FOMC's March meeting turned out to be more hawkish than expected. Besides announcing a further reduction of monthly asset purchase by USD10B, policymakers have pushed forward the tightening cycle and upgraded the labor market outlook. The Fed also modified its forward guidance, removing the thresholds of 6.5% unemployment rate and 2.5% inflation rate. The central bank, however, stressed that 'the change in the Committee's guidance does not indicate any change in the Committee's policy intentions as set forth in its recent statements'.
The central bank pushed forward the expected pace of its rate hike cycle, forecasting the Fed funds rate would rise to 1.0% at the end of 2015 and 2.25% at the end of 2016. We believe the change was mainly driven by the more upbeat outlook in the labor market. Also, the fed lowered its unemployment rate projections, forecasting the jobless rate to reach 6.1-6.3% this year, down from 6.3-6.6% previously estimated, before falling to 5.6-5.9% in 2015, compared 5.8-6.1% previous projected, and 5.2-5.6% in 2016, compared with 5.3-5.8% projected previously. Meanwhile, the Fed lowered the mid-point for real GDP growth by one-tenth to 2.9%, 3.1% and 2.8% in 2014, 2015 and 2016 respectively. Headline and core inflation forecasts were little changed.
In the post meeting press conference, Fed chair Yellen suggested that rate hike could come around six months after the monthly bond purchase program ends. Yellen tried to quantify the term "considerable time" as Fed pledged to keep rates low for "considerable time" after the asset purchase program. And Yellen said that while it's "hard to define", it could "probably means something on the order of around six months". Fed is expected to continue to taper the asset purchase by USD 10b at each FOMC meeting, which would end by the end of the year. Hence, Fed could indeed start to raise rate as soon as next Spring.
Elsewhere, New Zealand GDP grew 0.9% qoq in Q4 as expected. SNB rate decision will be a major focus today and is expected to keep policy unchanged, and maintain the pledge to keep the EUR/CHF floor. Swiss will also release trade balance. Germany will release PPI and UK will release CBI trends total orders. US will release jobless claims, Philly Fed survey, existing home sales and leading indicators.