Market Reaction to FOMC Outcome

Market, Reaction, FOMC, Outcome, Fundamental Analysis, fx trader, forex

22 Sep 2016

● USD (NEER) – The Fed left rates unchanged again this month, at 0.25%-0.50%, and the dollar corrected. The Fed, while letting on that the rate hike is only postponed, and is likely to be implemented by the end of the year, also said that there is no rush to press ahead with the monetary policy normalisation process.

● While the assessment of the macroeconomic scenario is positive, the Committee is in any case committed to verifying that further progress is made towards the achievement of its policy goals.

● Beyond the near term, as expected, the Fed revised down the forecast path of interest rate hikes over the next two years, also due to the fact that the extension of the forecasting horizon to 2019 “allows” the increases to be spread over an extra year. More in detail, only two hikes are now expected in 2017, as opposed to the three contemplated by the scenario outlined in June, and three are now expected in 2018. The reduction in the number of increases expected next year prompts a slight weakening of forecasts for the dollar, even ahead of the potential hike before the end of the year.

● EUR – The euro strengthened on the outcome of the FOMC, albeit modestly – for now – from EUR/USD 1.11 to 1.12. The prospect of the single currency dropping slightly below EUR/USD 1.10 on the fed funds hike remains, but the downside revision of the interest rate hike path next year suggests the possibility that the euro may prove more resilient.

● Therefore, we have slightly touched up our 1m projection, from EUR/USD 1.09 to 1.10, to indicate that (1) barring markedly positive surprises from US data, the exchange rate should stay above EUR/USD 1.10, as has been the case since the beginning of August; and (2) a drop to below EUR/USD 1.10 should be tied to a Fed hike. We have left our 3m projection at EUR/USD 1.08, to indicate that a drop to just below EUR/USD 1.10 is still possible as a reaction impact to a fed funds rate increase by the end of the year. However, the probability of this scenario materialising is slightly lower, following the latest FOMC meeting.

● GBP – Sterling also strengthened on the outcome of the FOMC, rising back from GBP/USD 1.29 to 1.30 and from EUR/GBP 0.86 to 0.85. However, in the pound’s case, between now and the end of the year the main drivers will continue to be domestic data and the behaviour of the BoE, which has already let on that it intends to cut rates further by the end of this year, unless the growth picture improves in the near term. A few BoE speeches are on the agenda today: Carney, Cunliffe and Forbes.

● JPY – The yen’s reaction, on the other hand, was more significant. After the FOMC it appreciated, returning into the USD/JPY 100 area and reaching a high of USD/JPY 100.10. USD/JPY 100 is a key threshold, and failure to reverse downwards in the wake of the BoJ and Fed meetings suggests that the yen’s expected depreciation margin is probably smaller in view of a more gradual fed funds hike path than indicates three months ago by the Fed itself.