Danske Research Team
Danske Bank A/S
Key takeaways
-
The Fed has changed its reaction function in two important ways. 1) It will no longer tighten monetary policy just because unemployment is low if wage and inflation pressure is subdued and 2) The Fed will tolerate inflation above 2% without tightening monetary policy.
-
Fed call. We expect the Federal Reserve to change its forward guidance stating that the Fed funds target range will not be lifted 'until inflation will run above 2% for some time'. We also think the statement will include more references to inflation expectations. We expect QE buying to be linked to inflation as well and think a faster buying pace is on the cards (although it is not a high conviction call).
-
Risk. Actions speak louder than words and unfortunately we see a risk that the Federal Reserve does not deliver that much at the upcoming meeting. If so the Federal Reserve may join the club of central banks with '0% rates and QE buying forever' if it fails in building up credibility right away. This is also why easing more is necessary at the upcoming meeting.
-
FX. On balance, the Fed's policy combined with (our expectations of) global macro means EUR/USD is likely to trade in the 1.18-1.20 range with risks tilted to the upside, especially on a 3M horizon. See details on page 4.
-
Equities. No matter how the Fed intends to implement the policy shift it means that monetary policy will be more important for equities near-term. Details on page 5.
-
Fixed income. We argue that 10Y US real rates are next to move higher, and that the real-rate gap will be slightly less negative. In our view it will mainly be US nominal yields that will move higher. Details on pages 5-6.
This publication has been prepared by Danske Bank for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Bank's research analysts are not permitted to invest in securities under coverage in their research sector.
This publication is not intended for private customers in the UK or any person in the US. Danske Bank A/S is regulated by the FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange.
Copyright () Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.
Recommended Content
Editors’ Picks
EUR/USD edges lower toward 1.0700 post-US PCE
EUR/USD stays under modest bearish pressure but manages to hold above 1.0700 in the American session on Friday. The US Dollar (USD) gathers strength against its rivals after the stronger-than-forecast PCE inflation data, not allowing the pair to gain traction.
GBP/USD retreats to 1.2500 on renewed USD strength
GBP/USD lost its traction and turned negative on the day near 1.2500. Following the stronger-than-expected PCE inflation readings from the US, the USD stays resilient and makes it difficult for the pair to gather recovery momentum.
Gold struggles to hold above $2,350 following US inflation
Gold turned south and declined toward $2,340, erasing a large portion of its daily gains, as the USD benefited from PCE inflation data. The benchmark 10-year US yield, however, stays in negative territory and helps XAU/USD limit its losses.
Bitcoin Weekly Forecast: BTC’s next breakout could propel it to $80,000 Premium
Bitcoin’s recent price consolidation could be nearing its end as technical indicators and on-chain metrics suggest a potential upward breakout. However, this move would not be straightforward and could punish impatient investors.
Week ahead – Hawkish risk as Fed and NFP on tap, Eurozone data eyed too
Fed meets on Wednesday as US inflation stays elevated. Will Friday’s jobs report bring relief or more angst for the markets? Eurozone flash GDP and CPI numbers in focus for the Euro.