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Dec FOMC: A More Hawkish Fed; EUR/USD A Sell On Rallies From Here

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As expected, the Fed hiked the target range by 25bp to 0.50%-0.75% from 0.25%-0.50% previously. The statement explains the hike by stronger growth in H2 16, a tighter labour market, higher (although still low) inflation expectations and higher inflation. As this was largely as expected, focus quickly shifted to the ‘dots’. •

Against expectations, the median ‘dot’ for next year was revised up to three hikes from two hikes previously, while the median ‘dot’ for 2018 was unchanged at three hikes. It was the first time since September 2014 that the Fed revised up its ‘dots’. The USD strengthened and US yields moved higher on the back of the hawkish surprise from the Fed.

The more hawkish Fed came as it now expects higher growth next year (revised up to 2.1% from 2.0%) and a lower unemployment rate (revised down to 4.5% from 4.6%). 

...The USD strengthened broadly, which was as expected given the surprisingly hawkish shift by the Fed expecting three hikes in 2017. In particularly, the JPY weakened sharply driven by its historical high negative correlation with US rates.

Strategically, we believe the USD will strengthen broadly near-term supported by rising US growth and rate expectations particularly versus rates-sensitive currencies such as the JPY.

We continue to see EUR/USD as a ’sell-on-rallies’ from here.


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