US Dollar
No surprise, the Federal Reserve kept rates at the 5.25 percent benchmark in today’s widely anticipated decision. What has changed? The previous sentiment to higher inflationary pressures and further rate hikes seems to have dissipated as policy makers are potentially looking towards a more dovish outlook. Although US central bankers noted that inflationary pressures loom as the economy seems supported, they conceded to the fact that price growth is likely to moderate in the coming months. That simple change alerted markets to a plausible rate cut some time during the year and helped in softening the US dollar in New York session trading. Even less surprising was the fact that Chairman Ben Bernanke attempted to mix the sentiment by noting that the economy is expanding at a healthy rate and that further decisions will be broadly contingent on upcoming economic data. Realistically, today’s decision all but confirms what the overall consensus has been expecting and pricing in: that a rate cut is imminent as the world’s largest economy continues to drudge along at a relatively stable pace. Recent reports have showed that housing sector weakness is starting to creep into consumer spending patterns as manufacturing remains just shy of contractionary conditions. Ultimately, the sentiment is likely to keep weighted pressure on the dollar ahead of the weekend with little in the schedule to offer any short term reprieve. Focus will likely be placed on several speeches by Fed policy makers in the next two days, although they are not expected to offer significant clarity of today’s decision.

Euro
Economic data was positive in the overnight as higher Italian consumer confidence coupled with an optimistic Swiss trade surplus. For the month of February, the Swiss surplus widened better than expected, as exports rose a nominal 13 percent. The notion is likely to add to focus towards the country’s consumer spending in supporting a healthy short term growth rate. With the EURUSD currency spot remaining relatively low ahead of the US Federal Reserve decision, any Euro-centricism turned to comments by European Central Bank President Jean Claude Trichet. Speaking to the European Parliament, Trichet noted that wage growth remains among the main proponents for higher inflationary risk in the near term. By central bank estimates, the ECB head forecasted that although inflation is likely to slow in the spring and summer months, prices increases should return towards the end of the year. The notion would pit rates of consumer price increases at the ECB’s benchmark 2 percent target. Additionally, and likely to contribute to the overall support for inflation, Trichet noted that the upside risks existed as a result of euro region growth which “continues to expand robustly”. The comments are in line with previous suggestions by policy makers that rates continue to remain accommodative as the regional economies expand at the fastest pace in six years. Ultimately, the comments are helping the euro to climb higher through New York, aside from dollar weakness, as the market continues to price in the likelihood of further rate hikes by the regional central bank in coming months.

British Pound
The pound sterling was lower in the session following the appearance of a surprise dissenter in the Bank of England ranks. According to the meeting minutes release in the overnight, David Blanchflower supported a rate cut in light of policy makers remaining concerned over the effects of current inflationary levels. The dissent brought the vote to an 8-1 passing of the recent 25 basis point rate hike. But it wasn’t only the lone dissenter that took markets by surprise. Looking deeper into the minutes release, traders saw creeping dovishness in recent policy maker sentiment as wage pullbacks may suggest that inflation is likely to be contained in the short term. Noting that the risk of inflation had pared back somewhat, central bankers noted that “the initial recorded outturns for recent wage settlements and relatively subdued inflation expectations led the committee to judge that the upside risk to inflation from wage growth might have started to diminish.” The observations were line with Blanchflower’s arguments of “considerable evidence of spare capacity in the labor market.” Incidentally, the notion counters reigning sentiment of another rate hike in April and casts some doubt on the future direction of interest rates in the UK.

Japanese Yen
With Japanese markets closed for the Spring Equinox observance, there was little to recount in the session as the yen lost to the dollar in the morning session. However, yen proponents got a little bit of a lift today following comments from two notable figures that correctly forecasted Japan’s era of stagnant growth. Both Christopher Wood and Brian Reading predicted the Japanese bear market 15 years ago. Now citing a normalization of rates may help to boost the world’s second largest economy, both are stating that rates must rise in Japan. The higher rates would subsequently boost savings interest in the economy as well as lift consumer spending, a continually weak sector of growth in the country. Recently savings interest has gone abroad as domestic savers continue to search for higher rates of return elsewhere, in the US, Australia and New Zealand. However, Wood did note that although rates are likely to rise in the year, probability remains low that the actual decision will come within the quarter. Separately, BSI large manufacturing and all industry surveys are expected in the overnight alongside the merchandise trade balance.

Commodity Currencies
The comm dollars amassed gains today as the high-yielding Australian dollar hit new ten year highs near .8100 while the New Zealand dollar pierced .7100 with the help of slightly dovish outlook from the FOMC. The Canadian dollar picked up strength as well, reaching a one month high on the back of encouraging economic data. Initially, Canadian retail sales did not look pretty as the headline figure slipped 0.2 percent, with much of the downward momentum provided by a 2.4 percent drop in auto purchases and a 3.5 percent plunge in gas receipts. When the sales in the automotive complex were excluded, however, the gauge actually printed a 0.3 percent pick up, suggesting that consumption growth remains alive and well. As a result, domestic demand should continue to thrive and serve as a major driver of economic expansion in the country and keep the Bank of Canada steady at 4.25 percent.

John Kicklighter is a Currency Strategist at FXCM.