BNP: FOMC unlikely to be a bullish USD catalyst

From the FXWW Chatroom: At today’s meeting, the Fed is fully priced to hike its policy target range by 25bp. Markets will be mainly focused on the central bank’s signals regarding future tightening in the months ahead. We expect the Committee and Chair Yellen to be cautious, emphasizing data dependency and reserving judgement on the impact of coming fiscal measures until more details and certainty are available next year (see here for more details). As for the dot plot, our economics team expect no changes to the previous year-end median Fed funds estimates of 1.125% for 2017 and 1.875% for 2018, implying 50bp of hikes in 2017 and 75bp in 2018. The Fed funds futures currently price the Fed funds rate ending 2017 around 1.115%, close to fully pricing the Fed’s projections for next year and our own forecast. Given this, we would not expect the USD to benefit significantly from the meeting outcome and, with USDJPY and EURUSD now trading well through our year-end 2016 targets, we would not favour tactical dollar longs heading into the meeting. However, looking beyond the potential for a near-term USD pullback, in 2017 US front-end rates still have considerable room to adjust higher to fully price our expectation for four further rate hikes in 2018 and we target a non-consensus 128 in USDJPY by end-17. Consistent with this view we have added a bullish USDJPY one-year call struck at 121.50 with a 132.50 KO to our recommendations portfolio last week. On the data front, we expect November numbers to show another month of solid retail sales gains balanced by soft industrial production.

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