European session review: USD appreciates following hawkish-sounding Fed policy announcement

USD continued to advance against its major counterparts in the European session on Thursday after the Federal Reserve’s latest policy update, which was released yesterday afternoon, signaled earlier-than-expected interest rate increase and a possibility of a near-term tapering of the bank’s monthly asset purchases. 

The U.S. Dollar Index (DXY), measuring the U.S. currency's value relative to a basket of foreign currencies, rose 0.7% to 91.77.

At its latest meeting, the FOMC kept the target range for the fed funds rate near zero and maintained the pace of asset purchases by at least $120 billion per month, as widely expected. The U.S. central bank also confirmed its commitment to the view that recent inflation spikes have largely reflected transitory factors. However, the Fed's dot plot projections, which are closely watched by investors for indications of the future trajectory of interest rates, revealed that the FOMC’s members are now predicting at least two interest rate hikes in 2023, a year earlier than seen in March.

In addition, the Fed’s Chairman Jerome Powell confirmed that the central bank’s policymakers have begun discussing tapering asset purchases, but added that this was the "talking about talking about meeting” and repeated that the Fed would provide an “advanced notice” before announcing any updates regarding tapering. He also reiterated that “dot plots are not a great forecaster of rates”.