EUR/USD Rate up Following June FOMC: Analyst Reactions

The euro to dollar exchange rate (EURUSD) is seen edging higher following the June FOMC event as markets get the hint that Fed policy makers are in no mood to raise interest rates.

The US dollar exchange rate complex (DXY) is seen trading lower in the wake of the June  Federal Open Market Committee (FOMC) policy decision, press conference and the release of their latest economic projections.

As expected there was no change to interest rate settings but the dollar was seen softer against the euro and other majors after the Fed lowered their dots on the dot plot graph once again.

We wrote earlier that this would be the case.

The dot plot chart shows where each participant in the meeting thinks the fed funds rate should be at the end of the year - for the next few years and in the longer run.

Lowering the dots implies interest rates are going to rise at a slower pace than previously anticipated.

The US dollar needs the promise of higher interest rates to keep it bid; by denying it higher interest rates the US dollar will find it harder to rally.

Here is the dot plot graph going into the meeting:

Here is the chart following the June meeting:

The FOMC projections still indicate two rate hikes for 2016, but there are now six (out of 17) members, who only see one hike for this year.

Further, the dots now indicate fewer moves in 2017 and in 2018 than projected even as the Fed released slightly higher inflation forecasts.

The longer run rate was lowered to 3% from 3¼%.

"This would be the third time that the long run target rate has been cut since September 2015 and could signal that the Fed is gradually losing confidence in the kind of tightening cycle that history demands," says Robin Brooks at Goldman Sachs.

The FOMCs statement assessed the economic situation and was well balanced, ensuring markets could not pull the trigger on any perceived bias.

The statement highlighted the FOMC’s expectation that "labor market indicators will strengthen" again, suggesting the Fed is not too concerned with the recent slowdown in the labour market.

"With today’s statement and updated projections, the Fed left all options on the table, including a rate hike in July. We thus stick to our call for two more moves in 2016 – even as we acknowledge that there is now a sizeable minority within the Committee favoring only one hike for this year," says Harm Bandholz at UniCredit.

The reaction of the dollar would suggest agreement as there is no notable damage that can be laid at the door of the Fed.

"The EUR-USD is expected to remain trapped in the near term with downside support expected to kick in towards 1.1200 in the near term following the FOMC," says Emmanuel Ng at OCBC Bank.

Ng says to the topside, the 55-day MA (1.1311) may continue to serve as a near term cap.

"Beyond the dollar complex, Brexit risks are expected to remain for the coming week, with the EUR-JPY and EUR-CHF still expected to be heavy," says Ng.

Ahead of the Statement we Reported...

"We have long argued that the Fed's last chance to raise rates before the US Presidential election will be in July. After that the FOMC officials are likely to stand down. Although the Fed is a non-political body it will be loathe to get involved in what is turning out to be one of the most partisan campaigns in US history and will likely remain on hold until December," says Boris Schlossberg at BK Asset Management.

That's why today's decision will be scrutinized carefully for any nuance in language and the volatility in pairs could pick up markedly.

From a strategic point of view, we have a couple more views to share.

• The Bullish View:

While the Fed could reference the uncertainty surrounding the EU referendum for striking a cautious tone, should they reaffirm the US economy continues to expand at a healthy pace, then market expectations for a Fed hike in July may increase markedly.

The dollar should be bid as a result

Ilya Spivak, Currency Strategist at DailyFX is leaning on a pro-USD outcome to the event.

He tells us:

"Traders’ Fed policy outlook took a sharp dovish turn after May’s dismal payrolls figures and markets will look to the central bank for validation.

Latest Pound / US Dollar Exchange Rates

	Live: 1.335▲ + 0.18% 12 Month Best: 1.3789
*Your Bank's Retail Rate	1.2896 - 1.295
**Independent Specialist	1.3163 - 1.3217 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

“For their part, central bank officials have been somewhat dismissive, warning that it would be unwise to over-extrapolate from a single data point subject to multiple revisions in the coming months.

"This means that investors could be surprised to find the plan for two rate hikes this year as well as baseline forecasts for growth, employment and inflation remain broadly unchanged.

“Such a result would appear hawkish relative current priced-in bets and seems likely to push the US Dollar higher. It may likewise stoke renewed risk aversion, applying outsized pressure on the Australian, Canadian and New Zealand Dollars."

• The Bearish View:

Yann Quelenn, market analyst at Swissquote Bank tells us:

“Volatility promises to be weak today ahead of the FOMC meeting. Even though a surprise is still possible, this meeting is likely to be a non-event as the Fed should keep rates unchanged at 0.25% - 0.50%.

“In any case, financial markets have completely ruled out a raise. Even a July raise seems very unlikely at the moment. We will closely follow the press conference and the following statements as we expect that the “dots” projections for next year should diminish.

“Indeed, the growth forecast should be lowered as it weighs on monetary policy. On top of that given the recent soft data, including weak NFPs and sluggish demand, we continue to believe that no rate hike will happen in 2016. Yet, policymakers will never admit that a 2016 rate hike is off the table and will continue hinting at a closer normalization of the interest rates.

“As a result we expect the dollar to further weaken over the medium term against major currencies as long as the first rate hike since last December 2015 is postponed.

“We target the EUR/USD to reach 1.1500 over the medium-term.”