**Why the Correction After FOMC?**
*By Tomasz Wyka
Source: FXStreet*
The financial markets experienced a significant shift following the latest Federal Open Market Committee (FOMC) meeting, with major currency pairs and equity indices undergoing notable corrections. Such responses often draw the focus of traders and investors, prompting questions about the underlying causes and implications for various asset classes. Understanding these corrective moves after Federal Reserve announcements is crucial for market participants, especially those operating in the fast-moving world of Forex.
This article delves into the reasons behind the market correction that followed the FOMC meeting. We explore the policy decision’s nuances, the market’s positioning, detailed asset class movements, and the underlying psychological and macroeconomic drivers. The article is based on analysis originally authored by Tomasz Wyka on FXStreet.
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### **FOMC: The Key Announcements**
At the core of the correction was the June FOMC meeting—an event widely anticipated by both traditional and Forex market participants. The Fed’s policy announcements often set the tone for global financial markets, and this occasion was no different.
**Main takeaways from the FOMC meeting:**
– The Federal Reserve opted to keep interest rates unchanged, aligning with broad market expectations.
– The accompanying statement and economic projections were interpreted as balanced, with a recalibrated “dot plot” signaling fewer rate cuts for 2024 compared to previous projections.
– Jerome Powell, the Fed Chair, emphasized a data-dependent approach to policy changes, with an ongoing focus on both inflation and employment numbers.
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### **Market Positioning Ahead of the Announcement**
Before the FOMC meeting, market participants entered various positions based on expectations shaped by macroeconomic data and policy signals from the Fed.
**Key pre-meeting factors included:**
– Anticipation of a dovish tone, leading to bullish bets on US equities and risk-on currency pairs.
– Elevated speculation on near-term rate cuts, reflected in fixed-income markets and the US Dollar’s (USD) positioning against major currencies such as the Euro (EUR), Japanese Yen (JPY), British Pound (GBP), and commodity-linked currencies.
– Strong equity performance, with major American indices pushing to all-time highs, partially paced by optimism over artificial intelligence growth.
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### **Immediate Market Reactions**
The immediate aftermath of the FOMC announcement saw sharp movements in various asset classes.
**US Dollar:**
– The greenback initially rallied, reversing a short-term downtrend as traders adjusted to projections pointing toward fewer rate cuts.
– EUR/USD and GBP/USD dipped as investors unwound expectations for imminent dollar weakness.
– USD/JPY surged, reflecting diverging policy stances between the Bank of Japan and the Federal Reserve.
**Equity Markets:**
– US equity indices, led by the S&P 500 and Nasdaq, saw a brief sell-off.
– Technology stocks, which had benefited most from dovish Fed hopes, were among the hardest hit in the initial wave of selling.
**Yields and Bonds:**
– Treasury yields climbed as markets repriced the likelihood and timing of future rate cuts.
– The move was particularly pronounced in the 2-year and 10-year segments, underlining expectations for persistent higher rates.
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### **Why the Correction? Core Drivers Explained**
Understanding why a correction occurred in the wake of the FOMC involves dissecting several intertwined market psychology and macro forces.
#### 1. **Dot Plot Surprise**
– The Economic Projections Summary—familiarly known as the “dot plot”—revealed that Fed officials now foresee just one rate cut by year-end. This was fewer than prior market consensus, which had factored in at least two cuts for 2024.
– This shift in expectations prompted traders to reprice USD assets, reversing some of the pre-meeting positioning that had anticipated more aggressive easing.
#### 2. **Data Dependence Emphasized**
– Fed Chair Powell’s press conference consistently
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