Good morning,
Fed hikes, dollar spikes
Fedmas is over and much like December 25th, it’s all done too quickly and everyone feels a little bit emptier as a result. The Federal Reserve found enough strength in the US economy to hike 25bps last night for the first time this year. This means basically nothing.
What matters is that the expectations shown in the dot plot charts show a Federal Reserve that is supremely uncertain as to the path of the US economy into 2017. Despite this, the broad picture of expectations now shows the median estimate now points to three interest rate rises in 2017 as opposed to the two that were forecast in September.
Some analysts are saying this was a hawkish Fed and to be prepared for a far higher USD as a result. We would have to disagree for now but that does not preclude more hawkish noises coming especially if the fiscal stimulus that everyone wants to know about, actually comes to pass.
For now they’ve noted the strength in inflation and the jobs market but this is a central bank eager to know what kind of administration they will have to work with and balance policy against. Until we get a flavour of that there was little chance of them basing policy on the pronouncements of someone who has a somewhat casual relationship with consistency.
Our eyes now move back to the politics in the United States and the imminent rebuttal of the Fed’s decision from the President Elect via his Twitter account.
Where to for the USD
We continue to view the USD as an asset that wants to rise. The Federal Reserve left a lot of room in its statement and the comments of Janet Yellen for dollar appreciation. USDJPY has risen to close to 118 overnight with EURUSD into the 1.04s and GBPUSD close to 1.25. Broad based dollar buying emerged as soon as those dot plots showed an extra rate rise next year and for now there looks like little that can get in its way.
The only caveat that we have in the short term is that while holding USD is a very crowded trade right now, the number of people expecting a pull back soon on the basis of the greenback being overvalued is also very high. It’ll just take one thing to start to reverse this trend but that will likely have to come from the data or from Trump Tower for now.
We reiterate our calls of EURUSD through parity in the first half of 2017 with GBPUSD also back towards 1.20 through Q1.
Forgot about Greece?
Yeah, it’s back! In the past week Eurozone finance ministers have threatened to cut Greece off again following spending promises from Prime Minister Tsipras that ‘appear not to be in line with the Eurozone’s agreements’.
Prime Minister Tsipras had promised tax relief for some islands that had been hit hardest by the migrant crisis as well as the resumption of a Christmas bonus to pensioners totalling around EUR617m.
This has not gone down well in Brussels and plans for debt relief from the European Stability Mechanism have been postponed. Greek bond yields are rising as a result and we expect further fallout in the New Year.
Bank of England decision this lunchtime
The Bank of England meeting will be largely overshadowed by events in the US but there is always the possibility of some volatility. Accusations will fly that the Bank of England is behind the curve with rates so low and inflation peaking higher but they will wait for a long time before shifting policy given fears of further downside risks crystallising in 2017.
We would be very surprised if the minutes hinted at a shift away from the current ‘neutral’ stance.
Have a great day.