– Federal Reserve raises rates for first time since June 2006.
– Fed ‘dot plot’ continues to see same 2016 year-end rate as in September 2015.
– Fed funds continue to only price in two rate hikes in 2016.
In what was perhaps the most telegraphed policy change of the past decade, the Federal Reserve raised rates for the first time since 2006. Yet in what we considered to be a “dovish hike” (an oxymoron), the Fed chose to maintain its expected glide path of its future policy rates (the median 2016 year-end rate was unchanged).
Chart 1: Fed’s Dot Plot – December 2015
Even though the lack of change in the Fed’s dot plot was perceived to be a bit more hawkish than anticipated, a review of the economic forecasts underscores why the US Dollar isn’t holding onto its gains.
Chart 2: Fed’s Revised Economic Projections – December 2015
While the Fed boosted its 2016 GDP forecast and lowered its 2016 Unemployment Rate forecast, it also reduced its 2016 inflation forecasts. The market may already be recognizing this as illogical: inflation is expected to remain below the Fed’s medium-term target of +2%, but the environment will still warrant four rate hikes in 2016?
We’ll be watching how the US yield curve moves around these developments and Fed Chair Yellen’s press conference at 19:30 GMT: the US yield curve has been flattening, and if ST yields continue to rise and start to supercede LT yields, we’d be looking at a yield curve inversion. For the US, every recession in the post-war era has been preceded by an inverted yield curve. Earlier this year, Canada saw its yield curve invert and subsequently entered in Q2’15.
Chart 3: EUR/USD 1-minute Chart: December 16, 2015
Around the FOMC meeting, EUR/USD traded in a wide range as market participants jockeyed for positioning early. Within the hour around the Fed’s rate announcement, EUR/USD traded between $ 1.0888 and $ 1.0968; volatility will remain high as Fed Chair Yellen takes the mic.
Lastly, as we approach the holidays and thus less liquid markets through the end of the year, it’s worth reviewing principles that help protect your capital. We call these principles the “Traits of Successful Traders.”
— Written by Christopher Vecchio, Currency Strategist
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