FX Focus: Dollar remains volatile after Fed keeps rates unchanged

The dollar endured a very volatile session on Thursday (4 May), after the Federal Reserve opted to keep interest rates unchanged the previous day, as widely expected by economists.

The greenback rose 0.20% against the yen to ¥112.98 and gained 0.14% against its Australian counterparts to AUD$1.3482 but slid 0.42% and 0.30% against the euro and the Swiss franc respectively to 0.9144 euro cents and CHF0.9918.

In a statement explaining its decision, the Fed said it viewed "the slowing in growth during the first quarter as likely to be transitory" and continued to expect that "with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace".

The statement prompted speculations the US central bank will raise interest rates next month, but some analysts suggested that is far from a foregone conclusion, even though the markets have already priced it in.

"The Fed is in no rush to raise rates too quickly as it's fully aware that rising inflation is less of a threat than tightening too fast, noting that it will stabilise around its 2% target," said Neil Wilson, senior market analyst at ETX Capital.

Michael Hewson, chief market analyst at CMC Markets, added: "The lack of any concern from Fed officials about the recent slowdown was taken by investors as evidence that the Fed was still on course to push rates up in June, however it was never likely that Fed policymakers would have taken the option off the table in any case.

"The relatively neutral stance was to be expected and makes the prospect of a move in June, no more likely than it was before."

The pound was also struggling for direction, despite a report showing Britain's services sector last month expanded at the fastest pace in the year so far.

Sterling was up 0.22% against the dollar, trading at $1.2891 but fell 0.24% against the euro, fetching €1.1787. Markit's Purchasing Managers Index (PMI) for the services sector rose from March's three-month high of 55 to 55.8 last month, compared with expectations for a 54.5 reading.

Any number above 50 indicates growth and April's figure marked the sharpest increase in business activity since December last year and the ninth consecutive month of expansion for the sector.

Sterling rose on the release, however the uptick was relatively muted as the report sounded warning signs over building inflationary pressures, due to the steep drop in the value of the pound since the EU referendum.

"The adverse impact of the fall in the pound was evident in the rise in the prices charged balance to its highest level since July 2008," said Scott Bowman, UK economist at Capital Economics.

"This could be the reason for the fall in the future activity index in April to its lowest level since November."