“Market participants have gone quite far out on a limb. Whereas even last time most FOMC members still suggested the prospect of two or more rate moves to come this year, futures traders expect only a single rate move – and even this only with a probability of around 50%. With regard to the 2017 outlook, the discrepancy is even bigger: The Fed believes in four rate moves, the futures market in one. And the FX market has also reacted accordingly. The ICE’s USD index (DXY) has fallen by around 6½% since early December. This is remarkable, for we must not forget that the Fed (like many other central banks) sets great store by the clearest possible communication of its true intentions. The reason why the market does not believe it is that in the past the US policymakers also announced a much more restrictive monetary policy than they delivered.”
“But it is not without risk to bet on the FOMC again failing to act as announced. At some point, the FOMC projections could largely prove correct. We, too, think the Fed is more likely to give no clear signal of a rate hike in June (see also page 5), which means that the corresponding expectations of some investors will not be met. But this would probably argue for an only slightly weaker dollar. Too much has been priced in here already.”
“Should our view be wrong, the movement in EUR/USD could turn out very strong. This means that opportunities and risks in a bet on an even weaker dollar are asymmetrically distributed.”
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