Jan von Gerich, the Global Fixed Income Strategist for Nordea explained that the Fed made only small tweaks to its statement today, characterizing economic activity as strong, and remains on track to raise rates again in September. We continue to see downside potential for the EUR/USD.
Key Quotes:
“The Fed did not offer any major surprises today. After a hike in June, rates were left on hold (at 1.75% – 2.00%) today in a unanimous decision, while the statement was tweaked to illustrate an even stronger recent performance of the economy.”
“The Fed said that economic activity had been rising at a strong rate (vs solid in June), job gains had been strong, while both overall inflation and inflation for items other than food and energy remain near 2%. Risks to the economic outlook appear roughly balanced. Global risks were not mentioned separately.”
“The tweaks in the statement merely illustrate the recent economic developments, and do not contain new monetary policy signals. We continue to expect two more 25bp hikes this year, one in September and the other one in December, which is slightly more than the current market pricing. For next year, we look for three further hikes, which is clearly more than the market is currently pricing in.”
“As expected the August FOMC meeting wasn’t a meeting that caused substantial moves in financial markets. The initial reaction was a modest fall in yields and a very slight increase in EUR/USD.”
“The market pricing of the Fed roughly reflects the quarterly rate hike pace for the rest of the year, as a hike in September and December are mostly priced in already. In 2019 and 2020, there is still a huge discrepancy between the Fed dot plot and the market pricing. Should the market start to price in more rate hikes in 2019, in accordance with the dot plot, we judge that the fair value of the 10yr treasury yields moves to range 3.00-3.25%.”
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