Feds Hawkish Dots Surprise

Feds Hawkish Dots Surprise

The Fed(dots) surprised on the hawkish side, paving the road for a broad USD rally as the FX markets activity roared back to life with volumes surging. US 10y yields rose 6bps towards 2.29%, while equities and gold all took a dip lower.
The markets jumped to attention when twelve Fed officials (up from eight in June) still want to hike at least once more in 2017. This overwhelming sign of confidence in the US economy caught traders by surprise and has transiently quashed the market view to sell dollar on rallies. While the Feds hawkish shift does not guarantee a December hike, it will take an unlikely string of tepid economic data to turn the Feds current suasion, but this unexpected policy lean should change investors view of the greenback from a red light zone to an amber scenario.

This change in sentiment is visible on the-the CME FedWatch Tool where the December rate hike probabilities are no longer profoundly underpriced. And with the markets underestimating on only about one-and-a-half hikes through the end of 2018, far below the Fed’s June middlemost view of four, a string of positive US economic numbers or even a glint of wage inflation could light a fire under the dollar bulls, and the USD could make an unlikely revival

If the markets were looking for a new US dollar narrative, today’s hawkish fed resolve is providing that fodder.
The markets were focusing on the Fed inflation view, and Chair Yellen did not disappoint the dollar bulls  stating  that inflation undershoots are “transitory…more broadly based” and are likely to “fade away.” While doubling down, stressed the Feds view that monetary policy also repeats with a lag…that’s also a risk that we want to be careful not to allow the economy to overheat.”

Well, folks, it doesn’t get any more brazenly hawkish from Dr Yellen who along with the majority of her colleagues are clearly in the December rate hike camp and the markets are reacting to this news.

The Euro

EURUSD caved from the 1.2000 area towards 1.1860 and them found a happy place near 1.1900.The EURO is holding the critical support zone as pre FOMC comments from another ECB hawk, Netherland’s Knot, stating that the ECB does need a recalibration of policy continues to resonate.
While today’s hawkish Fed resolve  is a win for the greenback, the Euro bulls will likely  to fade the EURUSD weakness as they continue to view the EURO as cheap in the face of  the  ECB  policy convergence

Japanese Yen

USDJPY cruised for pre-FOMC 111.10 levels to 112.20 before Yellen took to her post FOMC presser when then a high of 112.60 was printed. We’ve come off the highs in early APAC trade as the Asia traders continue to digest the overnight events.

Australian Dollar

The Aussie broke the .8100 level on the FOMC spike and got pummeled lower to the .7990 before finding some legs to march back above.8025 in early Asia trade. Regional currency sentiment, especially in Asia EMFX, remains stout on ebbing capital outflows and I think this is also boosting the Aussie sentiment which is used as a liquid G-10 proxy for APAC. Also, the Commodity Bloc is getting a boost from WTI prices which climbed above $51.07 into the Fix. Prices retreated after the FOMC meeting but just mildly as market sentiment remains buoyed by the Iraq oil minister’s comments that Opec was considering additional production cuts.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Stephen Innes

Stephen Innes

Head of Trading APAC at OANDA
Stephen has over 25 years of experience in the financial markets and currently based in Singapore as the Head of Trading Asia Pacific with OANDA. Stephen's market views focus on the movement of G-10 and ASEAN Currencies. His views appear in Bloomberg, CNBC.Reuters, New York Times WSJ and the Economist. His media appearances include Bloomberg TV & Radio, BBC International, Sky TV, Channel News Asia, ASTRO AWANI and BFM Malaysia. Stephen has an extensive trading experience in Spot and Forward FX, Currency and Interest Rate Futures, Money Market Derivatives and Precious Metals. Before joining OANDA, he worked with organisations like Nat West, Chemical Bank, Garvin Guy Butler, and Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario.
Stephen Innes
Stephen Innes

Latest posts by Stephen Innes (see all)