Key takeaways

  • On one hand, the Federal Reserve was not as dovish, as we had expected, but on the other hand not as hawkish as others had expected leaving the glass half empty/full. Basically, the message was “keep calm and carry on”, as the Federal Reserve will not hike rates until 2024 at the earliest.
  • We think the meeting was a slight disappointment making it harder for the Federal Reserve to achieve its new inflation goal of 2% average inflation. We no longer expect increasing QE buying pace unless we see an economic setback or a more significant risk off.
  • In our view, Powell’s press conference will likely mean the USD-negative reflation story is set to pause a bit longer. We now see the EUR/USD range as shifting from 1.18- 1.20 to being 1.17-1.19 but stick to our call of 1.23 in 6M time (see page 2).

Actions speak louder than words

On one hand, the Federal Reserve was not as dovish as we thought, as it did not increase the QE buying pace. On the other hand, it was not as hawkish as other had expected, as it changed its forward guidance reflecting the new regime. So is the glass half full or half empty then? The answer is: it depends. This probably also explains why markets cheered at first but later reversed. 10yr breakeven inflation rates ended the day marginally below where they were just before the announcement. Overall, we think the meeting was a slight disappointment making it harder for the Federal Reserve to achieve its new goal of inflation averaging 2% over time. For now we do not expect further easing from the Federal Reserve taking out our call for more QE, at least until we get stronger signals. Unfortunately, the Federal Reserve is not as supportive for the recovery, as it could have been, which also means that the reflation theme will not be a strong as it could have been.

So why is the glass half full? The Fed maintained its target range unchanged at 0.00-0.25% and linked future rate hikes to realised inflation outcomes stating that “it will be appropriate to maintain this target range until labour market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time”, very much in line with our expectations of a change in forward guidance reflecting the new flexible average inflation targeting regime.

During the press conference, Fed chair Powell made clear that “maximum employment” should be interpreted differently, as it is now a more “broad-based, inclusive goal”, i.e. the Fed will not tighten monetary policy just because the unemployment starts to fall significantly and in that way the tightening cycle after the Covid-19 crisis will be much different from the tightening cycle after the great financial crisis. Looking at the economic projections, the Fed is not expecting to raise rates through 2023.

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.

Analysis feed

FXStreet Trading Signals now available!

Access to real-time signals, community and guidance now!

Latest Analysis


Latest Forex Analysis

Editors’ Picks

EUR/USD challenges weekly lows after mixed Durable Goods Orders

US Durable Goods Orders were up a measly 0.4% in August, missing expectations of 1.0%, although Nondefense Capital Goods Orders ex Aircraft jumped 1.8%. Equities bounce from lows, but the dollar maintains its strength.

EUR/USD News

GBP/USD loses 1.2700 as the dollar keeps rallying

GBP/USD approaches its weekly low at 1.2674 as demand for the American currency extends into the final trading session of the week. Hopes for a UK trade deal with the EU doing little for Sterling.

GBP/USD News

Gold: Finally some rest bite as XAU/USD holds at $1865 per ounce

It has not been the best week for the gold bugs as the yellow metal has fallen 4.36% since Monday. At the end of the week, the price has started to consolidate at the USD 1865 per ounce area. 

Gold News

Breaking: ​​​​​​​The IRS makes it hard to pretend you don’t have Bitcoin

The cryptocurrency holders might have a hard time trying to hide their Bitcoins or other digital assets. IRS considers changing the standard 1040 form by including a bold question on the front page:  At any time during 2020, did you sell, receive, send, exchange, or otherwise acquire any financial interest in any virtual currency? 

Read more

WTI moves back to flat and once again trades above $40 per barrel

It has been a mixed Friday for WTI as the price is moving sideways heading into the weekend. All of the excitement was last week when the OPEC+ JMMC decided to keep output levels at their current rate until December.

Oil News

Forex Majors

Cryptocurrencies

Signatures