5 Reasons for the USD Rally (and Why it May Continue)

1.  A 'significant' change

The Fed altered the assessment of “significant underutilization of labor resources” and instead said the underutilization is “gradually diminishing”. It's a nod to the fall in the unemployment rate falling below 6%.

The statement was only put in a few meetings ago and Yellen has championed the plight of workers so this is a meaningful change and so long as job growth continues at around these levels, the decision about when to tighten will be solely focused on inflation.

2. The Fed didn't just end QE

There was a small chance the Fed could continue QE so ending it gave the dollar a slight boost but it wasn't just that the Fed ended it. It's slammed the door

3. Better signs on the economy

When the Fed announced it was ending QE, the statement also said officials “see sufficient underlying strength in the broader economy” to support more improvements in unemployment

4. “Market-based measures of inflation compensation have declined somewhat”

This is a negative sign for markets and this refers to things like 5-year breakevens and that's something Bullard highlighted. They've come down to 1.53% from above 2% three months ago. That's an ominous sign and the Fed is surely hoping for a quick recovery.

The takeaway is that inflation data will grow more important that jobs data in the months ahead.

5. Sometimes nothing needs to be said

A large part of the US dollar rally, we suspect, would have come so long as the Fed didn't do anything extraordinarily dovish. The US dollar trade was crowded in the days leading up to the FOMC and the traders were jittery and pulled out on soft pending home sales and durable goods orders. Other trades that got shaken out in the risk rout were also probably simply waiting for the event to pass so they could get back into longer-term positions.

The last point (and the dearth of good reasons to buy other currencies) is the best reason why the US dollar rally will likely continue.