Fundawrap: all about the Fed, if not just for an hourly stick

 

From a fundamental take on today's market, it was all about the Fed, if only for an hourly stick.

Markets waiting in anticipation of a hawkish hold, signalling June as a dead cert. The dollar has been moving up the early 90's with expectations that the Fed will be hiking at least two more times in 2018, with the possibility of a third hike before the year is out. 

At the same time, the reflation trade has been put into question where the global economy synchronised growth has broken down and that too has been fueling a bid in the dollar as the trade is unwound, (lower commodities and EM complex).

However, today's outcome of the FOMC lead to an immediate correction in the dollar. The US 10's slipped to a session low of 2.96 and the dollar subsequently fell from 92.6800  to the midpoint of its prior range of between 92.2230-92.7180. However, within an hour the dollar flipped over and that range in the DXY extended to a high of 92.8340 as the market finally figures after digesting the few changes in the statement fully that three more rate hikes for 2018 are firmly in play and selling in the EM intensified. However, the pace of tightening will now play a key role in the dollar's fate as we march on through the first half of 2018 and towards what could potentially be a slower pace of growth in 2019, as some economists are forecasting. 

All this ultimately means the Fed needs to get its skates on if the dollar is to continue on its northerly trajectory and if the Fed is going to give themselves some wiggle room at the top of their hiking cycle should 2019 prove to be a tough year for the US economy. But then again, the Fed seems comfortable with inflation rising above the 2% target considering for how long inflation has been below it, and as such, the risk is that inflation shoots higher, the Fed misses its opportunity and yields follow suit as investors lose confidence in the US economy and the dollar. 

Key headlines, (Source LiveSquawk):

• Fed holds rates but signals further tightening to come;  yields edge lower
• USD/JPY: retreats from 110.00 on mute fed
• US Treasury plans bigger debt auctions, sales of 2-month bills
• ECB's Weidmann: mid-2019 ECB rate hike still realistic
• UK cabinet rejects customs partnership model
• China official: China is much more able than us to handle a trade war
• Kuwait oil minister Al-Rashidi: OPEC not discussing prices
• Saudi Oilmin Al-Falih: producers will adjust plans if needed
• Oil ends higher as international monetary fund threatens to expel Venezuela
• ADP report shows us adds 204k private-sector jobs in April