The dollar certainly struggled with the dovish no hike decision by the Fed. However, Yellen noted that a hike is still on the cards this year.
The team at Bank of America Merrill Lynch sees it only as a tactical delay.
Here is their view, courtesy of eFXnews:
At today’s meeting the FOMC not only failed to hike, but also delivered a relatively dovish message, says Bank of America Merrill Lynch.
“We view this as a tactical delay and have pushed out our forecast of the first hike to December. However, we still expect the Fed to hike faster than the market is pricing in, with four hikes in both 2016 and 2017,” BofA projects.
There were two key messages in the Fed’s directive, according to BofA: First, they are very concerned about global economic and financial developments…Second, The FOMC also rejiggered its forecasts.
FX implications: USD on a back foot, but not forever.
“The dollar weakened across the board post-FOMC reflecting the increased risks to already low inflation from external developments causing the Fed to delay hiking. The lowering of the median dots raises risks around a hike this year. But, the FOMC’s confidence in the outlook (particularly in the labor market) underpins hikes later this year, and therefore, the policy divergence theme we expect to support the USD,” BofA notes.
“With a 30% chance priced into the meeting, we would expect some near-term pressure on the USD””particularly versus commodity-linked currencies where USD positioning is largest””as the timing of the first hike is now less certain. However, with any significant USD weakness likely to incent other central banks (like the ECB) to ease further and given our view for a December Fed hike, we see USD downside as limited here,” BofA projects.
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