Fed Extends Asset Purchases

The final FOMC meeting of the year has helped cement USD weakness into year end with the Fed reaffirming its commitment to maintaining a strong easing presence in the market for a longer period of time than previously projected. The Fed reassured markets that it intends to continue it monthly asset purchases of at least $120 billion until such time that the economy has made a substantial recovery. In the statement issued alongside the decision, the Fed said: “The Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals,”

In terms of the current assessment of the economy, the Fed was broadly upbeat, noting that the recovery is underway, but was clear to underscore downside risks, saying that there is still a long way to go. With this in mind, the Fed said that it “expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the committee’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time.”

"Powerful Message"

The Fed had previously discussed laying out clearer guidance around its asset purchases and Powell said he hoped this new guidance would send a "powerful message" about the Fed's intent. Powell said: “What we’ve done is we’ve laid out a path whereby we’re going to keep monetary policy highly accommodative for a long time . . . until we reach very close to our goals, which is not really the way it’s been done in the past.”

Fiscal Stimulus Hopes

Despite the guidance around monetary policy, Powell was keen once again to stress the need for further fiscal support, saying: “It looks like a time when what is really needed is fiscal policy and that’s why it is very positive thing that we’re getting that.". The FOMC meeting concluded as law-makers in Washington inched closer to agreeing a $750 billion bi-partisan COVID relief bill. The original amount proposed was more than $900 billion. However, in a bid to gain broader support, some of the more highly contested elements, such as those around provisions for businesses and municipalities, have been stripped out.

With expectations of forthcoming fiscal stimulus, and with the Fed committed to maintaining a highly accomodative monetary policy approach, the outlook for the US Dollar looks tilted towards further losses into year end. With equities markets firmly rallying amidst increasing vaccine optimism, there is little to suggest any sort of meaningful recovery for USD in the near term.

Technical Views

DXY

The Dollar Index continues to slide lower within the bearish channel which has framed the recent spell of downward price action. DXY has broken below several key levels on its descent, most recently the 90.72 level, and while price holds below here, the near term prospects remains fixed on further downside. The next key support to watch will be the 89.36 level.


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