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The U.S. economy will fall into recession in 2023 according to the Federal Reserve, prompting markets and the Dollar to trade in weak fashion.

Minutes from the March meeting of the Federal Open Market Committee included a presentation from staff members on potential repercussions from the recent turmoil in the U.S. financial sector, that began in early March.

Vice Chair for Supervision Michael Barr said the banking sector "is sound and resilient," but the reserve bank's economists said the economy will take a hit.

Projections show Fed officials expect GDP growth of just 0.4% for all of 2023.

Given expectations for growth of about 0.22% in the first quarter (according to the Atlanta Fed), the economy will potentially see negative growth rates in the second half of the year.

"The Federal Reserve's forecast for a mild U.S. recession has unsettled markets, with concerns rising about the worsening economic picture in the world's largest economy," says Susannah Streeter, Head of Money and Markets at Hargreaves Lansdown.

The Dollar was weaker across the board following the developments as the new forecasts only encourage market participants to expect rate cuts from the Fed later in the year.

The GBP/USD exchange rate rallied above 1.25 and EUR/USD took out the 1.10 barrier in the hours following the Fed's latest assessment.

The Fed's assessment followed the release of U.S. inflation data that showed another fall in headline inflation, although core inflation readings met investor expectations.

"The data point added to markets pricing in further rate cuts by the Fed by year-end, with pricing going from 0.4% worth of rate cuts to 0.5% worth of rate cuts. As a result, GBPUSD and EURUSD led the charge higher back to recent highs," says Thanim Islam, Head of FX Analysis at Equals Money.