Fed still on track for hikes - HSBC

"The Fed has left its median projection for the Fed funds rate (the “dots”) unchanged for 2017 and 2018," notes Daragh Maher, Head of FX Strategy at HSBC.

Key quotes:

"This suggests there is still support for one more hike before year-end and three more in 2018 despite the prevalence of downside surprises to inflation over the last six months. The USD is justifiably rallying in response as there was a chance that the dots for both years might have been lowered. The pace of tightening envisaged by the Fed continues to be more rapid than priced into the rates market. However, the Fed has been a lot more hawkish than the market for a long time."

"This theme therefore remains unchanged. The extent of the USD rally is likely to be tempered by two factors. First, the Fed’s view is that the most probable path for the Fed funds is for another hike before year end, but this is not the same as a guarantee of a hike. There is plenty more data to come that could alter opinions, and the decision to retain a December hike projection may have been a close call for some Fed members. Second, the dots for 2019 and the longer run were lowered, reflective of a dovish shift in mood albeit further out on the timeline."

The other aspects of the FOMC decision are unlikely to have a currency impact. The formal announcement of the start of balance sheet reduction simply matches the outline given at the June Fed meeting and was widely anticipated. It should already be in the price. The median projections for GDP and the unemployment rate for either the next few years or for the longer run were not meaningfully altered."

"Any USD reaction, however small, is most likely to be evident against the JPY. This is about a currency reaction to a cyclical driver and the correlation of USD-JPY to US two-year Treasuries is substantially higher than for other G10 currencies.  Attention will now move to Chair Yellen’s press conference. Her tone is likely to be balanced, if only to encapsulate a divided internal debate within the Fed, so any further FX reaction will be about the nuances of her narrative rather than any overt signal on policy."