The Fed kept rates unchanged in March but lowered significantly its median projections for future rates in 2016, 2017 and beyond. The Fed did all that while keeping its growth, inflation and unemployment forecasts for the US little changed. During the press conference the Fed Chair explained that the global growth slowdown and lingering risk aversion mean that the downside risk to Fed's outlook have grown since December. The Fed seemingly ignored recent evidence that core inflation gauges have accelerated to reflect the improving housing and, to a degree, labour market conditions. All that seemingly underscored its entrenched dovish bias in the face of improving US data and weaker global conditions. The USD sold off promptly in the wake of the Fed meeting with AUD, NZD and JPY leading the gains.
The question whether the USD-weakness will be sustained ultimately depends on the evolution of the Fed's view of the economy. Easier financial conditions in the US from here, on the back of more resilient market risk sentiment abroad, together with further improvement in the US data and especially the US inflation gauges should ultimately put the Fed in a position to hike rates again (CACIB economists expect next rate hike in June). This should mean that the longer term risks for USD should be on the upside as it becomes even more attractive investment currency.
At the other end of the spectrum is JPY. Indeed, unwarranted FX appreciation on the top of weak data and subdued inflation should ultimately force the BoJ to ease aggressively further potentially as soon as next month.
In the case of the commodity currencies, it seems that the combination of improving risk sentiment and recovering commodity prices could keep them supported in the near term.
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