The Fed not only put a Fed hike off the table put put it firmly on, also seeing the US economy with relatively rosy glasses. This led to a crash in EUR/USD on striking monetary policy divergence.
Th team at Nordea provides a quick analysis of the event and its implications:
Here is their view, courtesy of eFXnews:
The Fed left the door open for a rate hike in December as it dropping its previous warning about the risk global economic and financial development posed to the US economy and repeated that economic activity is expected to expand at a moderate pace.
On hold: Given the souring tone of recent US economic data and mixed signals from Fed officials, it is no surprise that the Fed kept rates unchanged today. Also in line with expectations, Richmond Fed President Lacker dissented again, supporting an immediate 25bp rate increase.
December rate hike remains on the table: While the Fed acknowledged the recent slowdown in job growth, an otherwise roughly unchanged statement on the economy in our view indicates that the Fed leadership still believes lift-off in December is likely, if the US economy performs in line with the central bank’s forecast of continued moderate growth and higher inflation. Thus, today’s FOMC statement repeated that economic activity is expected to “expand at a moderate pace” and there were no major changes to the description of either inflation or inflation expectations. Moreover, by dropping its previous warning about the risks global economic and financial development posed to the US economy, the Fed clearly left the door open for a December rate.
For now, our baseline continues to see a Fed rate hike in December, contingent on improvement in US labour market data. See below for more discussion.
Regardless of the exact timing of the first hike, we continue to believe that rising inflation pressures will imply that the Fed will raise rates faster than is currently priced in by markets. Thus, our forecast sees the fed funds target range at 0.25-0.50% by end-2015, 1.25-1.50% by end-2016 and 2.25-2.50% by end-2017.
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