Fed sounds more cautious but don’t abandon the USD

From the FXWW Chatroom: The FOMC shifted to a more cautious message in its statement Wednesday, noting that it was closely monitoring global developments and assessing their implications and dropping the formulation from December describing risks as balanced. US front-end rates responded by reversing their pre-meeting gains and the USD lost ground as well. Equity markets seemed to find little reason to rejoice in a less hawkish message and weakened after the meeting, compounding pressure on USD-low yielder pairs and preventing gains by higher beta currencies vs. the dollar. While the statement has dealt another setback for the USD, we do not expect the USD to lose much more ground in response. For one thing, rates markets were already priced for minimal Fed tightening in 2016 heading into the meeting. There is little room to reduce expectations, while there is plenty of scope for front-end rates to rise if financial conditions and data begins to improve. Secondly, as we have emphasized in the past, the same conditions which are prompting the Fed to take a more cautious tone are also moving other central banks in the G10 towards further easing. The ECB demonstrated this last week, as did the RBNZ statement overnight, while the Bank of Japan tomorrow is another potential example. Ahead today, we expect durable goods orders to have remained subdued in December, particularly when a likely pickup in aircraft orders is excluded, but weekly jobless claims could be more important given Fed focus on labour market conditions.



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