FOMC proved semi dovish in the FX space - Nordea Markets

According to analysts at Nordea Markets, the overall assessment of the FOMC meeting and press conference is semi dovish in the FX space.

Key Quotes

“The Fed (on average) opted against hiking the 2018 outlook in the dot plot, why the market is still almost spot-on aligned to the pricing of three rate hikes this year. If anything the market is actually slightly ahead of the Fed dot plot for 2018, with a little more than 3 hikes priced in overall. This could be the reason why markets react by sending EUR/USD higher.”

“On the other hand the market reacts by sending e.g. 5y1y USD rates higher, even though there is already a correction in markets by the time of writing. Recently markets had also front-runned the possibility of a hike of the so-called R* - the longer-run interest rate in the dot plot. 5y1y rates indicated a big implied probability of a higher longer-run dot plot – and the Fed has partially taken account of that by hiking the 2020 and long-term perspectives on average for the Fed funds rate in the dot plot. Hence, the FOMC partially acknowledges the higher probability of a higher policy rate in the US, which is already priced in by markets.”

“The hike of the long-end of the FOMC dot plot should underpin the USD rather than the opposite over the coming weeks, as it should re-steepen the USD curve a little - Something that the USD needs to regain its footing. We still judge that it is too early to expect a substantially more hawkish pricing of the Fed – and hence also substantially higher USD interest rates, as the short positioning in the USD bond market is already very stretched.”