FOMC Review: Hawkish Fed even without Trump's fiscal boost
|As expected, the Fed hiked the target range by 25bp to 0.50%-0.75% from 0.25%-0.50% previously. Against expectations, the median 'dot' for next year was revised up to three hikes from two hikes previously while the median 'dot' for 2018 was unchanged at three hikes.
Also, Fed Chair Janet Yellen sounded more hawkish in the press conference than previously. Although she said that the changes to the 'dot plot' were 'really very tiny' (suggesting that we should not over-interpret small changes), she 1) abandoned the case for 'running a high pressure economy' and 2) indicated that the Fed has not fully taken Trump s fiscal plans into account, which could result in further Fed hikes than currently indicated by the new 'dots'.
We stick to our view that the Fed hikes twice next year (June and December) but risk is now skewed towards three hikes. It is still important to remember that the Fed turns more dovish next year due to shifting voting rights. The number (and the timing) of Fed hikes now depends on what strategy Donald Trump pursues with respect to implementing his economic plan, as the Fed will respond to more expansionary fiscal policy by raising rates faster.
Strategically, we believe the USD will strengthen broadly near term supported by rising US growth and rate expectations. We continue to see EUR/USD as a 'sell-on-rallies'. Longer term, we continue to expect EUR/USD edging higher towards 1.08 in 6M and 1.12 in 12M.
Looking ahead, we still see the US curve flattening further and especially 2Y, 5y and 10Y yields moving higher as the market slowly prices in a higher probability that the Fed plans to hike three times 2017.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.