As expected, the Fed hiked the target range by 25bp to 0.50%-0.75% from 0.25%-0.50% previously. Against expectations, the median 'dot' for next year was revised up to three hikes from two hikes previously while the median 'dot' for 2018 was unchanged at three hikes.
Also, Fed Chair Janet Yellen sounded more hawkish in the press conference than previously. Although she said that the changes to the 'dot plot' were 'really very tiny' (suggesting that we should not over-interpret small changes), she 1) abandoned the case for 'running a high pressure economy' and 2) indicated that the Fed has not fully taken Trumps fiscal plans into account, which could result in further Fed hikes than currently indicated by the new 'dots'.
We stick to our view that the Fed hikes twice next year (June and December) but risk is now skewed towards three hikes. It is still important to remember that the Fed turns more dovish next year due to shifting voting rights. The number (and the timing) of Fed hikes now depends on what strategy Donald Trump pursues with respect to implementing his economic plan, as the Fed will respond to more expansionary fiscal policy by raising rates faster.
Strategically, we believe the USD will strengthen broadly near term supported by rising US growth and rate expectations. We continue to see EUR/USD as a 'sell-on-rallies'. Longer term, we continue to expect EUR/USD edging higher towards 1.08 in 6M and 1.12 in 12M.
Looking ahead, we still see the US curve flattening further and especially 2Y, 5y and 10Y yields moving higher as the market slowly prices in a higher probability that the Fed plans to hike three times 2017.
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