Fed dampens rate hike speculation and USD

Dampening rate hike speculation is one of the real talents of Fed President Janet Yellen. During yesterday's FOMC press conference she sent out relatively strong dovish signals to the market, despite an economic upturn in Q2, so that USD came under pressure. First of all she declared that there was no fixed rate hike plan. the Fed will not be hiking rates with a "mechanical approach". 

The market should not expect that interest rates would rise in every meeting or every other meeting. The latter is what some analysts had so far assumed to be the speed of the expected rate hikes. The rate path was going to depend solely on the development of the economy and inflation. Of course that does not mean that the cycle will not show a certain pattern, states Commerzbank. That would be pure coincidence though rather than pre-planned, or at least that was what Yellen suggested. Even though her comments make sense, anyone thinking back to the QE tapering (the reduction of the Fed's bond purchases) will remember: the then Fed President Ben Bernanke had also underlined that the process was entirely data dependent. And in the end the FOMC reduced the purchases in constant steps at each meeting. 

The "significant appreciation of the dollar" would somewhat dampen the economy and inflation. Of course the president assumes that the effect will only be temporary so that a stabilisation of the exchange rate or even a moderate continued appreciation is principally unlikely to prevent the FOMC from hiking rates, notes Commerzbank. 

After all, the majority of the FOMC assumes that despite the appreciation so far there will be one to three rate hike steps this year, unless the data - such as inflation today - paints a less optimistic picture. 

However, it is clear that a renewed notable appreciation as it is seen in mid-2014 would negatively affect the FOMC's projections and thus the speed of the rate hike cycle. Therefore, EUR-USD will continue to trend downwards for the rest of the year, but that the movement will be much slower than in the previous two quarters, says Commerzbank.