FOMC kept the federal funds target rate unchanged at 0.25%- 0.50%

Market Movers

• Following the FOMC meeting last night, this week’s long list of central bank meetings continues with three meetings on the agenda today.

• We expect Norges Bank to cut its key rate by 25bp to 0.50% at the rate-setting meeting. We expect the rate path to be revised down, to a policy rate of 0.30% from Q4 16, indicating a c.80% probability of another rate cut before Q4 16.

• We expect the Bank of England (BoE) to maintain the Bank Rate and the stock of purchased assets at 0.50% and GBP375bn, respectively. At the last meeting, the BoE made it clear that it is definitely not ‘Fed light’ as there are many reasons for it to stay on hold for a long time - subdued wage growth, the ECB’s easing bias and Brexit uncertainties, to name a few.

• We expect the Swiss National Bank (SNB) to stay put as well. As the ECB effectively has ruled out more rate cuts, the pressure on SNB to deliver lower rates is limited. We think that the SNB will handle any unwanted CHF strength via intervention. We look for some limited downside near term in EUR/CHF but still expect it to move gradually higher towards 1.15 in 3-12M.

Selected Market News

As widely expected, the FOMC kept the federal funds target rate unchanged at 0.25%- 0.50% last night. The projections and statement revealed a very dovish Fed, which was a surprise as we have seen an improvement in US data, a rebound in risk sentiment and higher-than-expected inflation prints recently. The median ‘dot’ for this year was lowered down to signalling two hikes (from four in December), while the median ‘dot’ for next year still signals four hikes. While the door is not yet closed for a hike in June, we (and so do the markets) think the probability has declined significantly after the meeting. We stick to our view that the Fed will stay on hold until September and only hike once this year, although we admit that it still seems more likely that the Fed will hike twice this year than not hike at all. See FOMC review: Concerned Fed sends very dovish message to the markets, 16 March, for details.

The USD declined after the FOMC meeting versus all major currencies. The DXY index is 1.4% lower from yesterday’s high, while EUR/USD is testing new post-ECB highs above the 1.12 level.

More dovish central banks globally bode well for global risk assets in general and last night saw a solid rally in the fixed income markets, while the S&P 500 index rose 0.5%. The positive sentiment has also been carried over to the Asian session where all regional indices trade higher this morning.

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