Photo - Andreas Zanin
Andreas Zanin
Analysis | June 18, 2021

KTM FX Daily: G10 FX reaction to the hawkish Fed

Bond yields and dollar up, rest settled down-this was the market reaction to the latest FOMC meeting. As expected, the Fed kept its monetary policy settings unchanged, with Fed funds target range at 0.00-0.25% and bond-buying pace at 120bn$ per month. But the hawkish tone, which we didn’t expect either the market.

Driving factors:

  • Hawkish expression: The FOMC median dot plot signals two highs in 2023 vs. non in the March meeting. The financial markets were hoping for one hike in 2023-hence a hawkish expression led the USD crosses rally, and the risk-sensitive currencies like AUD and NZD surrenders.
  • Economic projections:

          The above table shows that the US central bank has upgraded its growth and inflation estimates noticeably. The core PCE inflation upgraded to 3% from 2.2 y/y and the unemployment rate              fall back to 3.8% in 2022 vs. 3.9% March projections.

 

         The latest FOMC dot plot and the economic projections are likely to elevate the USD against G10 currencies but not in a straight line, though. Especially against the CHF, EUR, and JPY, the             trend is down against the dollar.

Economists reaction:

  • Danske Bank: Fed’s focus remains on the upcoming tapering of QE. We now expect Fed to turn more hawkish in the coming meetings and begin actual tapering in Q4 2021, with the first-rate hike in H2 2022.
  • Nordea: A relatively aggressive dot-plot makes for a hawkish read-through to a potential tapering time-plan towards the end of this year. We also seem to have passed” talking about talking about tapering” to actually talking about tapering.
  • UBS: The Federal Reserve changed nothing, and everything. No policy was changed at yesterday’s meeting, but quantitative and monetary policy expectations shifted. The Fed seems to have considerable confidence in the economic recovery and has started talking about talking about joining Team Taper. The Fed Chair signalled this was not imminent markets may prefer to judge timing when the FOMC minutes are released.

RBNZ vs. Fed: RBNZ is leading, as per ANZ. 

In a research note Economist at ANZ said, “We are bringing forward our first forecast OCR hike to February 2022”.

Interestingly ANZ forecast OCR will take off quicker than the Fed. Wednesday Fed meeting confirmed members of the Fed discussing a rate hike in 2022. With the latest report, we leaned that ANZ is expecting the 1st OCR hike in 8 months timeframe.

Price action post-Fed:

It is important to always keep in mind the risks involved in trading with leveraged instruments.

What is your Technical View?

Do you have a different idea? Please leave us a comment and get an answer from our professional analysts

 

Latest Article
Improve your trading with a True ECN Broker
Trading account overview