The June FOMC meeting last night was a firmly bullish event for the Dollar with the greenback trading higher across the boars in response to the meeting. While hawkish expectations were fairly well built up leading into the event, with USD remaining at depressed levels after a full quarter of sales, the unwinding of short positions saw USD charging higher across the G10 space.
Dot Plots Revised Higher
While no change in monetary policy was announced, in line with expectations, it was the adjustments in the Fed’s outlook and guidance which provoked the aggressive FX response. Most notably, the upward revisions in the Fed’s ‘dot-plot’ forecasts were the main catalyst. The forecasts, which show how each individual (and also the collective) view US rates moving over the target timeframe showed that 13 policymakers now forecast a rate hike in 2023, up from just 7 in March.
Growth & Inflation Revised Higher
The newly revised dot plot forecasts suggest 50bpp worth of rate hikes across 2023. Additionally, with the Fed revising higher its growth and inflation forecasts, the prospect of tapering being brought forward has also increased. Looking at inflation in particular, the Fed now sees core PCE ending the year at 3%, up from 2.2% in March.
Tapering In Focus
Away from the dot plots and economic forecasts, the actual policy statement was little changed and so the focus has been mainly on these technical developments. Given these revisions, the market is now putting a great deal of focus on when tapering is likely to start and while the Fed is keeping its cards close to its chest for now, the upgraded dot plot forecasts and economic forecasts are clear signal that the Fed is soon to embark upon the path to normalising policy.
Looking ahead, the growth prospects for the US are filled with upside risks. Provided the US can avoid a further outbreak of the virus and the return of any lockdown measures, the rest of the year should see a solid increase in economic activity as the economy continues to work through the pent up demand currently in place.
Technical Views
US10Y
The yield on 10Y US treasuries has broken out above the bear channel again, as projected. However, price is currently being capped at the 1.584 level. With MACD turned bullish here and the RSI lifting, the focus is on further upside above this level with 1.685 the next target to note.
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With 10 years of experience as a private trader and professional market analyst under his belt, James has carved out an impressive industry reputation. Able to both dissect and explain the key fundamental developments in the market, he communicates their importance and relevance in a succinct and straight forward manner.