The December FOMC last night proved to be less of a market catalyst than many were hoping for. Given the relatively stagnant price action over recent weeks, many were hoping for a decisive USD move on the back of the meeting.
Expectations were geared towards a hawkish outcome from the Fed, in line with the ongoing strength in data and more hawkish commentary from Fed policy members. While the meeting did come in on the hawkish side of the line, it appears that USD bulls were left a little underwhelmed given the soggier tone to USD we’ve seen over the European open today.
As expected, in terms of actions, the Fed announced that it would increase the level at which it tapers its asset purchases. In sum, tapering will now be set at $30 billion per month, double the $15 billion per month announced in November. Fed Chairman Powell noted robust improvement in labor market conditions as well as rising inflation as the drivers behind this decision.
Economic Forecasts Lifted
Along with the announcement on tapering, the Fed’s economic forecasts were upgraded, with the Fed now projecting GDP and inflation to grow at a faster level over the coming year. The Fed now sees GDP hitting 4% in 2022, up from 3.8% prior with core PCE inflation (the main inflation gauge the Fed uses) seen hitting 2.7% in 2022, up from 2.3% prior.
Additionally, the Fed sees the unemployment rate hitting 3.5%, down from 3.8% prior. Finally, the Fed also projects its own Fed funds rate hitting 0.9% in 2022, up from just 0.3% prior.
Dot Plot Projections Raised
The biggest hawkish development was in the Fed’s dot plot forecasts. The Fed now projects three rate hikes in 2022, up from one forecasted in September. Additionally, the Fed sees a further three rate hikes in 2023 and two more in 2024. With QE now scheduled to end around February instead of May, the market is looking for a first-rate hike somewhere in Q2, most likely June.
Optimistic Over Recovery
Looking ahead, the Fed remains broadly optimistic on the US economy and, as yet, is showing no concern over the Omicron variant. So, given the broadly hawkish tone to this meeting, how come we see USD under pressure? Well, as ever, part of the reason is likely because hawkish expectations were well baked in.
However, given the surprise with the dot plots, the USD sell-off seems a little odd and perhaps points to the fact that markets are a little more concerned about Omicron. With this in mind, it will be a case of seeing how USD trades over the coming week.
Technical Views - DXY
DXY failed once again on the approach to the 97.08 level, with price potentially craving out a double top here.
Both MACD and RSI are turning lower now, and a break of the 95.83 level would be a firmly bearish development, focusing on a correction towards 94.63 and the channel low next.