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US Dollar Slips Despite Rate Hike and Signal For Three More in 2018

US Dollar Slips Despite Rate Hike and Signal For Three More in 2018

Talking Points:

- FOMC raises benchmark interest rate to range of 1.25-1.50%, as was expected by markets (Fed funds futures were pricing in a 100% chance pre-meeting).

- Near-term Fed interest rate glide path remains unchanged from December 2016, March 2017, June 2017, and September 2017: three more 25-bps hikes are anticipated in 2018.

- US Dollar produces choppy reaction intially, with the DXY Index eventually settling lower ahead of outgoing Fed Chair Janet Yellen’s press conference.

The Federal Open Market Committee did what was widely expected of them today when they announced they would raise the main overnight benchmark rate into a range of 1.25-1.50%, as was priced into the market well in advance of today’s policy meeting. Ongoing improvement in US labor market data, plus signs that growth conditions are continuing to improve, have offset an otherwise stable (yet slightly disappointing) inflation environment.

Looking at the summary of economic projections (SEP) and ‘dot plot,’ commentary from the initial FOMC statement suggests that policymakers are more optimistic on the US economy. Policymakers expect “inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term.”

If there were to be a fly in the ointment in the future for the Fed’s projected rate hike timeline, then it seems it would be inflation: “Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.”

Overall, the FOMC saw the median Fed funds rate at 2.125% at the end of 2018, as they did in December 2016, March 2017, June 2017, and September 2017. Likewise, they saw the median Fed funds rate at 2.688% at the end of 2019, as was the case in the prior four SEP. In sum, today’s statement can be seen as more hawkish than what markets were pricing in ahead of time, given the outlook for only one hike next year. Yet today feels like a 'December 2015 FOMC meeting redux' - back then, like now, the market was less aggressive on glide path than FOMC was, and eventually FOMC proven wrong; was the USD's albatross through first nine months of 2016.

Here are the Fed’s new forecasts:

Here is the Fed’s new dot plot:

See the DailyFX economic calendar for Wednesday, December 13, 2017

Chart 1: DXY Index 1-minute Chart (December 13, 2017 Intraday)

Immediately following the release of the policy statement, the US Dollar slipped back versus the Euro and the Japanese Yen, with the Dollar Index (DXY) dropping from 93.79 ahead of the FOMC decision to as low as 93.59. The DXY Index was trading at 93.67 at the time this report was written.

Fed Chair Janet Yellen is scheduled to speak at 14:30 EST/19:30 GMT; her Q&A should prove equally market moving as the initial statement release. Follow the commentary in the DailyFX Real Time News feed.

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.