The Federal Reserve concluded its first monetary policy gathering of 2024 today and voted by unanimous decision to maintain its benchmark interest rate unchanged within in its current range of 5.25% to 5.50%, in line with consensus expectations.

Almost two years ago, the Fed initiated one of its most aggressive hiking cycles in decades to tackle runaway inflation, delivering 525 basis points of rate increases in process. However, over the past four meetings, the institution has remained on hold due to softening price pressures in the economy.

For context, headline CPI peaked above at 9% y-o-y in 2022, but has since fallen sharply, clocking in at 3.4% y-o-y last month.

While still above the 2% target established by the central bank, progress on disinflation argues for a more cautious approach, as risks have become more two-sided. While the overall tone was a bit more dovish, the Fed also indicated that it does not expect to reduce borrowing costs “until it has gained greater confidence that inflation is moving sustainably toward 2%. This may be a sign that the FOMC is not yet ready to pull the trigger and ease its stance at the March meeting.

Immediately after the FOMC announcement was released, gold prices pared some of their early session gains as Treasury yields and the U.S. dollar attempted to stage a comeback.

EUR/USD - The Euro continued to wilt against the United States Dollar on Thursday as the Federal Reserve’s commentary from the previous session gives the latter broad strength. A slight fall in Eurozone headline inflation had little impact on the pair, perhaps because the core rate topped forecasts.

The US central bank left borrowing costs alone, as had been universally expected. However, while its next move is still thought likely to be a rate cut, Chair Jerome Powell’s words after the decision left the markets pretty sure that no such move is coming at the Fed’s next policy call, slated for March. Indeed, May is now thought a more likely bet.

GBP/USD - One of the most interesting revelations of the monetary policy report was the forecast for inflation to drop to target in Q2 this year, which implies phenomenal progress when compared to the November figures which estimated only reaching the 2% target at the end of 2025.

This you would think is great news if the Bank of England didn’t expect inflation to re-emerge, remaining above target until the end of 2026.

One of the more closely observed indicators of the Bank’s medium-term inflation outlook is the 2-year CPI forecast which rose notably to 2.3% from November’s estimate of 1.9% - further highlighting the risk of sticky inflation.

Sterling picked up a bid on the news as markets eased expectations of rate cuts. The 2-year Gilt yield rose in kind, while the FTSE 100 also partook in the post-MPC advance.

USD/CAD - The pair extends the rally during the early European trading hours on Thursday. The USD has attracted some buyers following the Federal Reserve (Fed) meeting on Wednesday. The Fed committee agreed unanimously to keep the benchmark Federal Funds Rate at between 5.25% and 5.5% for the fourth straight month. Additionally, the decline in oil prices exerts some selling pressure on the commodity-linked Canadian Dollar (CAD) and acts as a tailwind for the USD/CAD pair.