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Richard Franulovich, head of FX strategy at Westpac, suggests that the Fed’s dots should see a dovish shift, the existing median for two hikes this year likely falling to one, but the big story could be the dovish tail.

Key Quotes

“Two of seventeen dots expected no hikes this year in Dec 2018 (likely Bullard and Kashkari) but with the Fed in a data dependent mode and influential commentators like Brainard highlighting the expiry of Bipartisan Budget Act in early 2020 (+0.3% of GDP 2018/19) the threshold for hikes later this year is very high.”

“It wouldn’t be a surprise if the number of dots for no hikes this year jumps significantly from two. Powell, Clarida and Williams all reiterated last week that Fed Funds is “at” or “within the range” of neutral, but with Fed Funds at 2.375% and neutral ranging from 2.5-3.5% it must be the case that the neutral dot has fallen, likely to a new median of 2.50%.”

“USD sticking to its broad 95-97.7 range for yet another week, a dovish Fed next week likely to see the lower end of that range tested. However, we suspect there is one more hike from the Fed this year and that could prove to be a meaningful catalyst for USD upside, given that rates markets price in a 45% chance of a Fed cut by mid-2020. But that won’t be a story until well into H2 2019.”