Fed Do The Bare Minimum
Yesterday’s .25% Rate increase was the latest example of a dovish hike by the Fed. Markets were widely expecting the hike, with implied probability ahead of the meeting just shy of 100%. However, markets were also expecting the Fed to mark a decidedly hawkish tilt, upgrading the Dot Plot over the forecast horizon and preparing investors for an accelerated pace of tightening over the coming years, in line with recent comments.
However, once again, USD bulls were left disappointed by a non-committal Fed who simply did the bare minimum and failed to register any increased hawkishness. The dissent of Fed member Neil Kashkari who voted against a hike was particularly incongruous and simply added to the downbeat tone of the meeting.
Dot Plot Disappoints USD Bulls
Regarding the dot plot, which investors were broadly expecting to be upgraded, there was only one, very minor change. The median dots for 2017 and 2018 were left unchanged at 1.375% and 2.125% respectively while the longer-term dot was also left unchanged at 3%. The only alteration was a small increase in the median 2019 dot from 2.875% to 3%. The Fed’s rate increase alongside refraining from upgrading the median policy path reflects the desire by the Fed to take advantage of better, current financial conditions rather than setting the stage for a faster pace of rate increases.
Statement Further Weighs on Expectations
The statement further dampened expectations with the Fed saying that they “will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal”. The term “symmetric” has been keenly debated and is essentially interpreted as meaning that the Fed will tolerate inflation running above their 2% target
Fed Still Stumped By Trump
The press conference following the meeting also provided little in the way to excite bulls. Fed Chair Yellen noted that this month’s tightening didn’t reflect a chance in the Fed’s economic assessment or policy outlook. Furthermore, Yellen noted that the current outlook doesn’t reflect any expectations of Trump’s proposed fiscal policy and that there is still a great deal of uncertainty aligned to this issue. The key takeaway here is that the Fed is unable to do much in the way of offering guidance until they receive details about the President’s plans. In this context, the Fed is simply waiting for Trump and as such the forecast policy path is vulnerable to changing as these details emerge.
FX Market Reaction
The aspect for FX markets was the dot plot. The basic summary is that Fed ember still forecast to rates to end this year at the levels pegged when they met in December and as such presents no new fuel for a higher USD at this time. The key focus now will be back on US politics as markets, and the Fed await further news on tax cuts, increased spending and deregulation, each of which could provide fuel for a USD rally. Until we see these details emerge, USD is likely to remain offered.
The Euro is receiving a bid not only from the weaker USD but also on the back of the Dutch elections outcome though focus still remains on the upcoming French elections. Stronger support for centrist candidate Emmanuel Macron is supporting the Euro, and if Macron wins as expected, his should further the EUR rally.
Tech comment: Still looking for price to rally into technical confluence at the 1.0975/80 level (50% Fib, bearish trend line, ACBD symmetry completion) for reversal signals to sell.
UST yields drooped in response to the FOMC meeting creating scope for a retracement lower in USDJPY. However, with the Fed still on course for 3 rate hikes this year and with the BOJ committed to keeping yields lower at the moment, this pullback feels like an opportunity to position for further upside.
Tech comment: Price still ranging between support at 111.50s and resistance at 116.10 with local channels guiding direction for now.
Dampened USD creates scope for a deeper rebound higher in Sterling as the Bank of England keep rates on hold, warning against rising inflation, while one member voted in favour of a hike. However, upcoming Brexit negotiations are expected to weigh on GBP, so the current range scenario is likely to persist.
Tech comment: Price challenging the broken bullish trend line from last year’s lows. A break here paves the way for a retest of bearish trend line resistance from Dec 2016 highs.
Equity Market Reaction
A 25bps hike was widely expected following recent commentary by various Fed members and the lack of any significant upward revision to the dot plot as well as a reference to letting inflation overrun, leaves scope for equities to move higher despite valuations being overstretched at current levels and the Trump reflation trade now being firmly priced in.
Tech comment: Potential lower high here could pave way for an ABCD correction into rising trend line support, with 38.2% retracement from last low, likely to find dip buying.
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