FXStreet (Delhi) – Jane Foley, Research Analyst at Rabobank, suggests that the December 16 FOMC meeting is the dominant market event and EUR/USD has been well supported in recent weeks suggesting that the market may be priced for a less than hawkish message from the Federal Reserve.
Key Quotes
“For sure talk of a ‘dovish tightening’ from the Fed has received a fair degree of attention in recent weeks. That said, while the market is largely agreed that the Fed will not want to shock
the market or undermine its own credibility by not hiking interest rates, there is far less consensus about the signals the Fed will give about the likely trajectory of rate hikes next year.”
“Surveys suggest that economists’ views are split between 2, 3 and 4 rate hikes in 2016. It is our view that the Fed is set to hike only twice next year. This lack of consensus suggests there is scope for continued, heightened volatility in markets into 2016. Our less hawkish expectation for Fed policy is consistent with our view that parity on EUR/USD may continue to be elusive in the months ahead.”
“We would argue that there are downside risks to the pace of the US recovery in the shape of
weakness in the global economy and in the strength of the USD. In a recent speech Vice Fed Chair Fischer referred to the 15% appreciation in the real, broad US exchange rate since the middle of last year as impacting both the US external sector and the inflation outlook. As its stands all measures of US price pressures remain moderate.”
“On the back of USD strength the US economy has already undergone a palpable monetary tightening. Given the risk of further easing in 2016 by other major central banks, the effective US exchange rate looks set to remain well supported on the back of interest rate differentials. In short, the USD is likely to continue to do some of the heavy lifting for the Fed indicating that the Fed may not find it necessary to hike rates again until the middle of next year.”
“Over the medium-term we expect the USD to remain well supported vs. the Fed, though we remain reluctant to forecast a move below the 1.05/1.04 area in 2016. In the short-term, the reaction of the USD will be guided not just by the message provided by the Fed but also by what the markets are positioned to hear. The gains in EUR/USD made since the start of the month suggest there is now less scope for a ‘sell on the fact’ reaction in the USD, though if a surprisingly dovish set of forecasts from the Fed for 2016 were outlined, this would still be likely. A more confident tone from the Fed on the outlook for both the US economy would likely chase EUR/USD lower particularly if Chair Yellen manages to hike US rates without sparking a sell-off in risk assets. If risk assets are spooked by the Federal Reserve, however, downside potential for EUR/USD could prove to be limited.”
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