My thoughts following the 25 basis points FOMC rate hike

The FOMC has just increased the Fed Funds target range by 25 basis points for a third time since December 2015 (from the previous 0.50%/0.75%) to now sit at 0.75%/1.00%. That much was already all but guaranteed and priced in following such a significant and co-ordinated attempt from FOMC members in recent weeks to prepare the market. The real interest and market moving impact has come in the FOMC projections and the dot plots.  From the market reaction, this was a slightly dovish FOMC and seems to have been more dovish than had been priced into the market.

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  • The dot plots have only change marginally with a 0.1% increase to the 2019 rates, from 2.9% to 3.0%. This leaves three hikes likely for 2017 and a further three for 2018.
  • The economic projections also show the most marginal of tweaks and I think this is where the market has been a touch underwhelmed. The inflation forecast has only been pulled higher by 0.1% for this year, whilst it is interesting to see that the Fed does not expect an overshoot of inflation still. Also perhaps the market would have been looking for more on the growth projections too other than just a 0.1% increase to the 2018%. This comes despite the huge increase to PMIs and also reord regional Fed surveys posted recently (especially the Philly Fed last month).

In the run up to the March announcement, the market had been pricing for three hikes in 2017. Aside from the March hike, there was a further 25 basis point hike expected in June (61% probability according to CME Group FedWatch) and also in December by which time the expectation is that the target range will sit at 1.25%/1.50% (with a 63% probability). However, a June hike is now very much in the balance around 49%  This FOMC statement and set of projections will do little to change that view of three hikes this year.

The impact going forward could take the wind out of the dollar rally at least for the near term. These ranges that have been building recently are liekly to continue at least, or perhaps drive a corrective move against the dollar. Looking further out, perhaps this now means the market will take a breather, and look towards perhaps Donald Trump and his “phenomenal” tax plan to drive the next breakout.

Will Yellen change everything with her press conference? The notorious dove is unlikely to be hawkish, so these trends are likely to be well set.

Market Impact

The announcement has been dollar negative, whilst being gold and equities positive. Bond yields have dropped sharply, but it interesting to see the 2 year yield hitting the breakout support at 1.300% bang on.

  • EUR/USD has jumped by 50 pips. Remember the resistance is at $1.0710 near term.
  • GBP/USD has jumped by 50 pips. Cable is testing the near term resistance at $1.2255 and a move above opens $1.2300, whilst the key resistance remains $1.2345.
  • USD/JPY has dropped by 60 pips. Below 114.00 which has been a pivot is a key near term move but the range remains firmly in place. This gives a marginal bearish bias for the near term but changes little.
  • Gold has rallied by $9 and is testing the near term resistance around $1211. The key overhead supply remains in place around $1220 and this is likley to be a ceiling still.

 

 

 

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