Fed's Wait-and-See Approach Sparks Yield Hunt in Risk Assets Amid Positive Economic Outlook

Meeting of the Federal Reserve became a catalyst for selling the dollar, with the U.S. currency index accelerating its decline to approach the 100.50 level after an initial negative reaction to the central bank's decision. Stocks responded with gains despite the uncertain reaction of the U.S. market yesterday, during which the S&P 500 closed modestly near its opening level. Today, U.S. index futures are rising, and there is a mild buoyancy observed in the European continent, where major stock indexes showed gains in the range of 1-1.5%. Gold prices are also in the positive territory. As for the treasury bond market, the restrained reaction at the long end of the yield curve was accompanied by a significant shift in expectations at the short end. Yields on two-year bonds, which are more sensitive to expectations about the Federal Reserve's rate trajectory, decreased by 10 basis points after the FOMC meeting:The Federal Open Market Committee (FOMC) unanimously decided yesterday to raise the interest rate by 25 basis points to 5.5%, marking the highest level in 22 years. This outcome was fully priced in, and other possibilities were not considered, so the market reacted to how the central bank outlined the prospects for further tightening. Of course, the central bank does not provide direct commitments to raise or not raise rates, so market participants tried to assess the level of "hawkish" stance based on characteristics of the state of the U.S. economy (labor market, consumer spending), as well as assessment of recent inflation slowdown. Interestingly, the central bank excluded a recession from its forecasts (a risk it had warned about earlier) as job growth had been characterized as robust, and the unemployment rate as low. During the press conference, Powell stated that a policy reversal would only be possible when there are signs of sustained inflation reduction, and June's slowdown in core inflation was unconvincing. Powell did not make any assumptions about future decisions, stating that the central bank will fully rely on incoming data in the decision-making process. Powell also considered it necessary to add flexibility to the position, stating that a rate hike in September is not ruled out and will depend on how the data behaves in July and August. According to Powell, the central bank now has time to pause and assess the effects of tightening.The pause in rate hikes, high uncertainty about the September decision, and a powerful positive revision of forecasts (recession exclusion, good chances of a "soft landing" after a period of high inflation) sharply increased risk appetite in the market, which should send the dollar on a downward trajectory for some time. Factors driving this include decreased demand for the dollar as a safe asset and the search for yields in markets outside the U.S. In my view, until the conference in Jackson Hole, where new important statements from regulators will be made, the markets are entering a relatively safe period of active yield-seeking, which should lead to the renewal of local highs for the S&P 500. As for the currency market, the key market bet will likely target new local lows for the dollar. Graphical analysis suggests a potential bearish target of 99 points for the U.S. dollar index (DXY):