USD: Well anticipated Fed rate hike resulting in limited market disruption - MUFG

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 17, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) – Lee Hardman, Currency Analyst at MUFG, notes that the US dollar has strengthened in the Asian trading session following last night’s FOMC meeting at which the Fed decided to raise interest rates for the first time since June 2006.

    Key Quotes

    “The target range for the Fed funds rate was raised as expected by 0.25 percentage point to between 0.25% and 0.50%. Lift off from the Fed can be viewed at least initially as a success resulting in little disruption to financial market stability. The decision to raise interest rates has been well telegraphed by the Fed and has been greeted favourably by a rally in risk assets. Investors are no doubt relieved that the Fed has finally got around to raising interest rates removing some policy uncertainty while the normalization of monetary policy also provides a much needed signal of confidence in the US economic recovery.”

    “The Fed has also attempted to provide reassurance that the pace of monetary tightening is likely to remain only gradual, although less gradual than the US interestrate market is currently anticipating. The updated median Fed funds rate projections were lowered only marginally for the coming years. The Fed is signalling that it expects to raise interest rates every quarter in both 2016 and 2017.”

    “The median projection for the longer-run Fed funds rate was also left unchanged at 3.50%. It stands in contrast to the markets view which is roughly expecting the Fed to continue raising interest rates every six months over the same period. It supports our view that there is still scope for the market to price in a faster pace of tightening in the year ahead supporting a stronger US dollar.”

    “The actual pace of tightening will remain data dependent. As Fed Chair Yellen had previously highlighted in her speech from earlier this month, the Fed will carefully monitor “actual” and “expected” progress towards their inflation goal. From this perspective it is notable that the inflation projections for next year where lowered marginally but the median Fed funds rate projection was left unchanged which we view as a hawkish signal as well. We will review the FOMC decision in more detail in today’s FX Weekly publication.”
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