Talking Points
- GBP/USD on better footing than EUR/USD before FOMC.
- Expect NZD/USD to be particularly volatile with RBNZ today too.
With the US dollar sitting near 11-year highs versus the Euro, it would be logical to arrive at the conclusion that market participants are expecting a hawkish Fed to rule to the central bank roost in 2015.
After all, the Fed’s most recent dot plot projections point to a 0.75% main rate by the end of 2015 -- equivalent to two rate hikes. Yet market participants don’t agree.
The Fed funds rate as well as the overnight index swaps are pointing to a late-Q4’15 rate liftoff, which would only bring the Fed’s main rate to 0.50% by year-end. This discrepancy between the Fed's guidance and what's been priced into the market is worth monitoring.
Will the Fed take notice of recent market forces (falling inflation expectations, low sovereign yields, and plummeting energy costs) and embrace a more dovish outlook that the market is expecting? -- or, perhaps worse yet, will the Fed maintain its policy trajectory, forcing traders to reprice their expectations altogether? Either way, one party is wrong here.
Today’s FOMC statement, given the apparent misunderstanding between markets and the Fed, could be particularly caustic as reality comes crashing back to earth -- either for the US dollar (the Fed pushes back its own rate hike expectations) or for equity markets (the pricing in of sooner than expected rate hikes).
See the above video from technical considerations in EUR/USD, GBP/USD, AUD/USD, and NZD/USD.
--- Written by Christopher Vecchio, Currency Strategist