USD: Summer doldrums? - Westpac

The fourth instalment of the Fed’s post-GFC tightening cycle reinforced the contrast with other major central banks, notably the ECB and BOJ which continue to print money at a rapid rate and are yet to confirm an end to this QE, explains Sean Callow, Research Analyst at Westpac.

Key Quotes

“This outlook for H2 2017 and potentially into 2018 surely provides background support for the US dollar. Yet the FOMC announcement this week provided only a small boost for the dollar and market skepticism over the Fed’s upbeat outlook is likely to hamper USD in coming weeks.’

“The median fed funds rate projections of FOMC members has flattened out and may be starting to soften (2019). More immediately, markets simply aren’t convinced that we will see the rate rise that the FOMC projects during H2 2017. Indeed pricing for such a hike is only about 40%.”

“The data released just hours before the FOMC statement reinforced this skepticism and – to our surprise – produced a bigger USD move (down) than the FOMC headlines. May CPI slipped from 2.2% to 1.9% y/y while core retail sales flatlined after April’s bounce. The FOMC’s core inflation projection for 2017 was cut to 1.7%, setting up yet another year of failing to hit the 2% target.”

“The growth outlook doesn’t seem likely to cause the market to reassess its view on the funds rate any time soon either. Political turmoil in Washington DC seems likely to at least delay passage of any fiscal boost. Indeed following the retail sales and CPI data, the 10 year Treasury note yield fell to 2.10%, a low since November.”

“This is not a profoundly bearish USD outlook but does provide some fresh fuel for most major currencies near term. EUR/USD has run out of election-driven short-covering but can now have another try at 1.13, while AUD/USD should be able to hold well above fair value near 0.74.”