European stocks declined sharply on Friday, while the US dollar extended its losses after the Federal Reserve held its key interest rate at record lows and downgraded its GDP and inflation forecasts for 2016 and 2017.
After a mixed Asian session, European stocks declined across the board on Friday. Eurozone blue-chip STOXX 50 fell nearly 100 points, while major exchanges in London, Frankfurt, Paris and Madrid declined sharply.
The recent bout of volatility was triggered by the US Federal Open Market Committee, which voted 9-1 to keep the benchmark interest rate at a record low of 0.25%. Although the decision was expected, policymakers failed to reassure investors that the global economy was returning to normal. In fact, the Fed downgraded its GDP and inflation projections over the 2016-2017 period, likely in response to emerging market volatility.
Fed officials expect the US economy to grow 2.1% this year, higher than the June forecast of 1.9%. However, GDP growth will average only 2.3% and 2.2% in the next two years, down from a prior estimate of 2.5% and 2.3%, respectively.
PCE inflation – the Fed’s preferred measure of consumer price growth – is expected to average 0.4% this year, down from a prior estimate of 0.7%. PCE inflation is forecast to trend slightly below the Fed’s target of 2% until 2018.
US stocks whipsawed on Thursday before ending mostly lower. The selloff extended into Friday’s early morning session, where the Dow Jones Industrial Average was down nearly 200 points.
The US dollar was among the hardest hit by the Fed’s inaction. After plunging 1% on Thursday, the dollar index declined by another 0.2% on Friday.
The dollar continued to lose ground against the British pound. The GBPUSD advanced 0.3% or 55 pips to 1.5635, its highest level since August 26.
The EURUSD held steady above 1.14 after making a more than 100-pip advance in the previous session.
A tumbling US dollar helped shore up gold prices on Friday. Gold for December delivery, the most actively traded contract, surged more than $20 to $1,137.60 per troy ounce on the Comex division of the New York Mercantile Exchange.
Oil prices slipped again on Friday, with West Texas Intermediate falling $1.61 or 3.4% to $45.29 a barrel. Brent crude, the international benchmark, declined 77 cents or 1.6% to $46.31 a barrel.