Fed lift-off passes but communications point to further USD strength – MUFG

FXStreet (Delhi) – Derek Halpenny, European Head of GMR at MUFG, notes that the first rate hike by the Federal Reserve since June 2006 has finally taken place with the dollar firming modestly.

Key Quotes

“Reflecting the fact that the move and all that goes with it was well telegraphed with Fed Chair Yellen’s two speeches on 2nd and 3rd December containing much of the language used in FOMC statement or expressed by Chair Yellen in the press conference that followed. In our opinion the key highlights of crucial decision are as follows:

1) Economic developments are expected to only warrant “gradual” rate increases but crucially the path will be dependent on “incoming data”.
2) “Actual” as well as expected inflation will be “carefully” monitored.
3) The maintenance of the size of the balance sheet will be in place until normalisation of the fed funds rate is “well under way”.
4) The decision was unanimous, underlining the influence of Chair Yellen.
5) Despite the lowering of the core PCE inflation from 1.7% to 1.6% next year, the DOTS median fed funds rate by end-2016 was unchanged at 1.375%.
6) The DOTS median fed funds rate for 2017 and 2018 were lowered by 25bps and 12.5bps to 2.375% and 3.25% respectively.
7) The long run federal funds rate was unchanged at 3.50%.
8) While the median 2016 DOTS was unchanged, the range narrowed with the hawks shifting their projections lower.

The dollar is marginally stronger, which is saying something given the near unanimous view going into the meeting that Yellen would manage to implement a “dovish rate hike” that would see equities move higher, UST bond yields fall and the dollar weaken. To be fair Yellen has nearly managed two out of the three – equities have certainly advanced, the 10-year yield is now lower than yesterday’s open although the 2-year yield is still higher. So perhaps if US yields continue to reverse we might see the modest US dollar strength reverse as well. But predicting spot price action in the final weeks of the year is somewhat pointless.”

Derek Halpenny, European Head of GMR at MUFG, notes that the first rate hike by the Federal Reserve since June 2006 has finally taken place with the dollar firming modestly.

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