Fed Rate Hike Odds Steady but LT Challenges Remain for USD
- Fed minutes indicate a 'twist' in Fed thinking: raise rates sooner rather than later; then don't hike again for a while thereafter.
- Market will have to weigh ST hawkish versus increasing MT dovishness.
- See the DailyFX economic calendar for Wednesday, October 12.
The September FOMC minutes came and went yesterday with a bit of volatility and a plethora of interpretations - a quick look at reactions from banks reveals opinions across the hawk/dove spectrum - but at the end of the day, the US Dollar is seemingly no better or worse. After all, rate expectations for December remain intact around 68%, according to the December Fed funds futures contract (CME FedWatch has it at 69.5%).
However, despite the inclination it seems for the Fed to raise rates again in the next meeting or two (let's be real: if it's not December, they're going to wait until March for the next SEPs), there is clearly growing unease over the state of the US economy. The gist is basically that US productivity growth remains low, and as such, with material labor market slack remaining, the US may be stuck in a period of lower growth.
As such, the Fed is 'twisting' its language: it's sounding hawkish on the front-end; but increasingly dovish on the back-end. This is not a new phenomenon though as we first articulated in our November 2015 note, "Fed Rate Hike Cycle Doesn’t Necessarily Bode Well for US Dollar." Since early to mid-2015, the Fed has showed the proclivity to reduce its expected path of future interest rates (the glide path) which in turn has reduced the US Dollar's capacity to extend its rally from the 2012 lows.
If you think about this dance, with the Fed pulling forward short-term expectations while depressing longer-term expectations, it's evident why the US Dollar (via DXY) has moved sideways for the past two years. If anything, recent signals by the Fed suggest that more sideways trade within the DXY's 21-month range is set to continue for the foreseeable future.
--- Written by Christopher Vecchio, Currency Strategist
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