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EUR/USD Slips as FOMC Forecasts Three Hikes for 2017

EUR/USD Slips as FOMC Forecasts Three Hikes for 2017

2016-12-14 19:16:00
David Song, Currency Strategist
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Talking Points:

- Federal Open Market Committee (FOMC) Raises Benchmark Interest Rate by 25bp to Range of 0.50% to 0.75%.

- Fed Officials Keep Terminal Rate Around 2.75% to 3.00%

The Federal Open Market Committee (FOMC) followed a similar path to 2015, with Chair Janet Yellen and Co. voting unanimously to raise the benchmark interest rate by 25bp at the last policy-meeting for the year.

Moreover, central bank officials pushed up the interest rate dot-plot and now see three rate-hikes for 2017, with the longer-run interest rate dot-plot still projecting a terminal rate around 2.75% to 3.00%. The growth and inflation forecasts were little-changed, with only the GDP figures for 2017 highlighting a marginal upward revision to reflect a 2.1% rate of growth compared to the September projection for a 2.0% expansion.

Despite the small pickup in the interest-rate forecast, the Fed warned ‘market-based measures of inflation compensation have moved up considerably but still are low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months,’ and it seems as though the central bank will revert back to a wait-and-see approach at the next announcement on February 1 with Chicago Fed President Charles Evans, Philadelphia Fed President Patrick Harker, Dallas Fed President Robert Kaplan and Minneapolis Fed President Neel Kashkari slate to vote on the FOMC in 2017.

December 2016 Projections

EUR/USD Slips as FOMC Forecasts Three Hikes for 2017EUR/USD Slips as FOMC Forecasts Three Hikes for 2017

Source:Federal Reserve

September 2016 Projections

EUR/USD Slips as FOMC Forecasts Three Hikes for 2017EUR/USD Slips as FOMC Forecasts Three Hikes for 2017

Source:Federal Reserve

EUR/USD Slips as FOMC Forecasts Three Hikes for 2017

EUR/USD struggles to hold its ground following the Fed rate-hike, with the pair slipping below the 1.0600 handle ahead of Chair Janet Yellen’s press conference. The bearish reaction in the euro-dollar exchange rate may spur a move back towards the December low (1.0505) especially as the FOMC appears to be on course to further normalize monetary policy in the year ahead.

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