Investors Remain Unconvinced By Fed Projections

USD and Indices Pare Post-Fed Gains

US futures are marginally lower and the dollar is paring gains ahead of the open on Wall Street, as we see some early profit taking after the Fed unexpectedly maintained its hawkish outlook for interest rates on Wednesday.

Subdued inflation, recent Fed commentary, non-starter fiscal stimulus policies and the recent hurricanes are among the many reasons why investors had assumed that interest rate expectations would be scaled back at yesterday’s meeting but the policy makers clearly had other ideas.

Feds Hawkish Dots Surprise

Instead, the central bank announced plans to begin very gradually reducing the size of its balance sheet while only marginally revising lower interest rate forecasts between now at 2019, with another this year still planned. With the dollar having slumped since the start of the year, this provided some rare reprieve and more may follow as markets fall more in line with Fed forecasts. Especially if we see an improvement in the data in the final quarter of the year.

Markets Remain Unconvinced by 2018 Hikes

Even now, despite the Fed effectively forecasting four rate hikes before the end of next year, markets are pricing in only one or two and even then, unconvincingly. Clearly there is still a lot of convincing to do on the Fed’s part, potentially providing in the process plenty of upside for US yields and the dollar.

Source – CME Group FedWatch Tool

Of course, with Yellen possibly being out at the start of next year, this may not be a case of doubting what she says but whether she’ll be there to follow through. It will be interesting to see how the markets react should she be re-elected.

Draghi to Appear as Euro Softens Against the Greenback

With the euro having fallen back towards 1.19 against the dollar in the aftermath of the Fed announcement, it will be interesting to hear the views of ECB President Mario Draghi later today. There is a clear aversion to 1.20 in the pair within the ECB as whenever this level is approached, a mysterious ECB source says something that weighs on the currency.

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Draghi has tried and failed to do similar in the recent past, it will be interesting to see whether he tries the same today, not to mention whether there’s any truth to reports that policy makers can’t agree on whether an end date for QE should be set.

USD Rallies as Fed Holds Firm on Rate Hikes

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Craig Erlam

Craig Erlam

Senior Currency Analyst at OANDA
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the Wall Street Journal and The Telegraph, and he also appears regularly as a guest commentator on networks including Sky News, Bloomberg, CNBC and BBC. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.