The Federal reserve was more hawkish than anticipated and the meeting most likely marked the first step of the Fed taking the foot off the gas. Economists at Danske Bank think the message from FOMC and the likely path for US monetary policy support their call for a lower EUR/USD. The pair is forecast at 1.15 in 12 months.
The Fed was more hawkish than anticipated
“We were wrong thinking that this Fed meeting would not be a significant one, as the Fed was more hawkish than expected. The median Fed dot now signals two rate hikes by 2023 (we expected the Fed to signal one) and seven out of 18 FOMC members signal at least one rate hike already next year. Hence, this meeting was likely the first step in the Fed taking the foot off the gas, assuming that equities and inflation expectations hold up and jobs growth strengthens.”
“We now expect the Fed to turn more and more hawkish in coming months so that actual tapering will start in Q4 21 (previously in January 2022). We expect tapering is concluded in summer 2022 (previously September 2022). We expect the first rate hike in H 2022 (previously Q1 2023). Overall, we see a road from here with tapering, rate hikes and a mild liquidity tightening in coming years.”
“We continue to expect a moderation in the pace of expansion in the manufacturing sector (declining PMIs) and a shift towards dollar amid a slight tapering of cross asset inflation momentum. In our view, such macro and financial outcomes will involve downside pressure for EUR/USD from its currently elevated level and we continue to forecast 1.19 in 3M, 1.15 in 12M. The exact timing of cause remains highly dependent on the state of US labour market, risk sentiment and incoming macro data but the message from FOMC clearly is in line with our expected path for EUR/USD spot.”
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