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FOMC Preview: Fed to take their time - ING

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Mar 16, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    Research Team at ING, suggests that the financial tightness requires “cautious optimism” for now.

    Key Quotes

    “It seems that the hurdle for another rate hike from the Federal Reserve (Fed) is high, with the FOMC wary of adding to the tight domestic financial conditions. Fed speakers have, broadly speaking, been fairly dovish lately, and it usually takes them more than a few weeks of data to change their minds. Given that the data flow has been choppy, judging the underlying growth story is hard. Ultimately, we don’t think the improvement is longstanding enough for the Fed to consider a rate hike just yet. A further easing of financial conditions is desirable.

    • Despite the significantly better run of data of late, there are a number of reasons why we think it is still too early for the Fed to hike this month; perhaps the biggest is the sharp spike in US financial conditions. While conditions have eased since the January FOMC meeting, we suspect that the Fed will be wary of foiling any recovery. A further easing of financial conditions, coupled with an ongoing improvement in US data, is in our view a necessary prerequisite for another Fed rate hike.

    • Our analysis shows that changes in US financial conditions are approximately twice as correlated with changes in equities relative to the trade-weighted dollar. A simple rule-of-thumb would imply that a 10% increase in the USD index, together with a 5% increase in equity markets, would have no net effect on US financial conditions. Thus, the Fed could implicitly tolerate modest USD strength in a recovering equity market.

    • We see scope for short-term US rates to push slightly higher as a split FOMC will net out to three 2016 rate hikes remaining in the dot diagram (which is significantly above the current market pricing of just one hike this year). In terms of FX implications, we prefer to be positioned long USD against the low-yielders (EUR, JPY and CHF) as a way to play diverging monetary prospects in a risk-on environment.

    • While "stirring" signs of inflation will be viewed in a positive light, we think that the dovishly inclined Chair Yellen will look to convey a fairly neutral tone. An upgraded assessment of the US economy and fairly tamed rate hike expectations may be seen as a “Goldilocks” scenario for risk-sensitive EM currencies. Given the ECB’s largescale easing, EUR-funded carry trades could be back in fashion.”
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