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The USD and the Federal Reserve - Rabobank

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 26, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) – Jane Foley, Research Analyst at Rabobank, suggests that it may have come as a relief to many last month that the FOMC finally drew a line under speculation as to when it would start to tighten policy.

    Key Quotes

    “However, since then economic data have suggested that the first Fed rate hike of the cycle came in the midst of one of the weakest quarters in terms of US GDP growth since the middle of 2009. On top of that global headwinds in the form of concerns about growth in China and emerging market have not faded. As a consequence the market is now positioned for far less than the four interest rate hikes this year that were projected by the Fed’s dot-plot last month. We have maintained our view that the Fed may hike twice this year though currently the risks appear to be on the downside.

    Just when the odds relating to Fed tightening have been reducing, the chances that some other central banks will extend their easing policies have been increasing.

    If the USD were to decline against the currencies of these central banks the risks that they would be more aggressive in their easing policies would arguably increase. This is likely to limit downside potential for the USD this year.

    We have been arguing for some time that the relative strength of the US has been doing some of the heavy lifting in terms of keeping US inflation potential in check. The Fed may only have hiked interest rates once this cycle, but monetary conditions have been tightened in the US by virtue of the stronger USD. While this by itself presents a reason for the Fed not to hike rates too far this year, we expect that the Fed would likely have to change tact completely in order to provide enough of a shock for the market to short the USD.

    Since this would likely be too costly in terms of the Fed’s credibility we stick with our view that the USD is likely to remain well supported this year by relatively attractive interest rate differentials. Against the EUR we expect the USD to manage some moderate gains towards the EUR/USD1.07 area on a 3 mth view. Given the EUR’s status as a funding currency we would expect downside potential of EUR/USD to increase if risk appetite were to improve significantly.”
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