Fed’s monetary policy decision likely to weigh on DXY Index amid global reflation policies

The Federal Reserve’s monetary policy decision is expected to weigh on the DXY Index and prop up EM Asian currencies amid global reflation policies, particularly if the US and China agree to a trade deal in April, according to the latest research report from Scotiabank.

The Fed unanimously decided on Wednesday local time to maintain the target range for the federal funds rate at 2.25-2.50 percent as widely expected, in support of maximum employment and price stability.

Meanwhile, the US central bank also scaled back its projection of 2019 rate increases to zero from two.

Regarding the natural rate of unemployment, the March Summary of Economic Projections showed that top Fed officials maintained the 4.0-4.6 percent range of their estimates, with the median falling to 4.3 percent from 4.4 percent predicted in December.

The revision suggested the US economy can employ more people without risking an acceleration in inflation.

Additionally, the Fed released its "Balance Sheet Normalization Principles and Plans", which stated that it intends to slow the monthly reduction of its Treasury holdings from USD30 billion to USD15 billion beginning in May 2019 and intends to conclude the reduction of its aggregate securities at the end of September this year.

Beginning in October 2019, principal payments received from agency debt and agency MBS will be reinvested in Treasury securities subject to a maximum amount of USD20 billion per month; any principal payments in excess of that maximum will continue to be reinvested in agency MBS.

The average level of reserves after the FOMC has concluded the reduction of its aggregate securities holdings at the end of September 2019 will likely still be somewhat above the level of reserves necessary to efficiently and effectively implement monetary policy.

"With the DXY Index falling below the lower trendline of the ascending channel, we maintain our short USD positions against CNH, INR, IDR, KRW, MYR, SGD and TWD," Scotiabank further commented.