Never miss a story from Christopher Vecchio

Subscribe to receive daily updates on publications
Please enter valid First Name
Please fill out this field.
Please enter valid Last Name
Please fill out this field.
Please enter valid email
Please fill out this field.
Please select a country

I’d like to receive information from DailyFX and IG about trading opportunities and their products and services via email.

Please fill out this field.

Your Forecast Is Headed to Your Inbox

But don't just read our analysis - put it to the rest. Your forecast comes with a free demo account from our provider, IG, so you can try out trading with zero risk.

Your demo is preloaded with £10,000 virtual funds, which you can use to trade over 10,000 live global markets.

We'll email you login details shortly.

Learn More about Your Demo

You are subscribed to Christopher Vecchio

You can manage your subscriptions by following the link in the footer of each email you will receive

An error occurred submitting your form.
Please try again later.

Talking Points:

- FOMC raises benchmark interest rate to range of 2.25-2.50%, as was expected by markets.

- New dot plot suggests that two hikes could come in 2019, down from three; however, rates markets had been pricing in just one ahead of time. After the FOMC meeting, June 2019 was still eyed for a hike.

- Given FOMC staying a bit more hawkish than market pricing, the US Dollar has been able to recover some ground versus the other majors; however, is only back to breakeven on the day.

Looking to learn more about how central banks impact FX markets? Check out the DailyFX Trading Guides.

US financial markets have seen a wave of volatility in the wake of the Federal Reserve’s December policy meeting. The Federal Open Market Committee raised its main rate by 25-bps to a range of 2.25-2.50%, as was widely expected (72% probability according to Fed funds futures), but made a number of tweaks to its GDP and inflation forecasts, and thus, to its glide path of interest rates (known as the “dot plot”) moving forward.

Overall, the FOMC saw the median Fed funds rate at 2.4% at the end of 2018, no change given that this was the last meeting of the year. However, they saw the median Fed funds rate at 2.9% at the end of 2019, down from 3.1% in September 2018. The median Fed funds rate for the end of 2020 was dropped to 3.1% from 3.4%. Finally, the longer run expected rate was forecasted at 2.8% from 3.0%.

Here are the Fed’s new forecasts:

US Dollar Recovers as FOMC Hikes by 25-bps, Signals More to Come (at a Slower Pace)US Dollar Recovers as FOMC Hikes by 25-bps, Signals More to Come (at a Slower Pace)

Here is the Fed’s new dot plot:

US Dollar Recovers as FOMC Hikes by 25-bps, Signals More to Come (at a Slower Pace)

See the DailyFX economic calendar for Wednesday, December 19, 2018

The result from the Fed seems to be an attempt to thread the needle for a dovish rate hike today, but it may not have worked. While the Fed cut its expectation for rate hikes in 2019 from three to two, this was still slightly richer than what rates market were pricing in ahead of time, which was only for one rate hike.

Perhaps most notable was the commentary by Fed Chair Jerome Powell at his press conference regarding the range of estimates for the economy moving forward. While Chair Powell stressed that his views are increasingly dependent on data, he noted that the dispersion of estimates among FOMC members had increased; in other words, the Fed’s confidence in its own forecast was decreasing (less dispersion means more unanimity in views).

DXY Index Price Chart: 5-minute Timeframe (December 19, 2018 Intraday) (Chart 1)

US Dollar Recovers as FOMC Hikes by 25-bps, Signals More to Come (at a Slower Pace)

Immediately following the data, the US Dollar jumped higher versus the Euro and the Japanese Yen, with the Dollar Index (DXY) rallying from 96.62 ahead of the FOMC decision to as highas 97.07. The DXY Index was trading at 97.00 at the time this report was written, held back by what was a significant move in US Treasury yields:

US Treasury 10-year Yield Chart: Hourly Timeframe (December 2018) (Chart 2)

US Dollar Recovers as FOMC Hikes by 25-bps, Signals More to Come (at a Slower Pace)

There is an argument to be made that the sharp drop in US Treasury yields – the 10-year is down to fresh December lows and its lowest level since May 30 – is not due to the change in perception around the Fed, but rather a ‘risk-off’ move brewing in US equity markets. For the US Dollar, its rise today on the heels of a drop in yields and stocks does not necessarily bode well for the future.

S&P 500 Price Chart: 1-minute Timeframe (December 19, 2018 Intraday) (Chart 3)

US Dollar Recovers as FOMC Hikes by 25-bps, Signals More to Come (at a Slower Pace)

Read more: US Dollar Awaits Results of December FOMC Meeting

FX TRADING RESOURCES

Whether you are a new or experienced trader, DailyFX has multiple resources available to help you: an indicator for monitoring trader sentiment; quarterly trading forecasts; analytical and educational webinars held daily; trading guides to help you improve trading performance, and even one for those who are new to FX trading.

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

To contact Christopher, email him at cvecchio@dailyfx.com

Follow him in the DailyFX Real Time News feed and Twitter at @CVecchioFX