Heading into the Federal Reserve meeting there was already a very high bar set for a hawkish policy meeting. In the event the Fed kept to the script. They hiked by 50 bps, indicated further 50 bps rate hikes were to come, and also think the neutral rate is going to be at around 2.40% by year end. So, with rates currently at 0.875% there is another 150 bps worth of rate hikes to come between now and the year end. This was all expected.
A high bar was set
Heading into the meeting we were expecting a ‘buy the rumour, sell the fact response’ and this is what the initial reaction was. The start in QT was based on a phased approach with the Fed expected to take 3 months to bring the level up to $60 bln in treasures and $35 bln in Mortgage Backed Securities. On top o f this dovish development Jerome Powell ruler out a 75 bps rate hike, so this all meant the Fed were unable to surprise markets with a more hawkish response, so there was an initial move lower in the USD. See the reaction here:
Fading USD weakness
However, the USD weakness was not sustained post the FOMC. The strength in the USD is also partly due to the slowing global trade situation. As a global reserve currency the USD tends to gain when global growth slows. So, the recent concerns over slowdowns in China’s growth has also been a bullish pressure for the USD. This week we have some important inflation data out for the US. The US inflation rate is forecast to fall to 8.1% y/y down from the prior reading of 8.5%. Any signs of ‘peak inflation’ takes pressure off the Fed to hike rates and can result in some USD selling. This could boost the EURUSD this week as the ECB are increasingly making calls for a July rate hike. On the other hand if inflation comes back in high then expect more USD strength.
