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In the mid of challenging global environment, the Fed opted for a rate hike to bring the global economy back on track. Fed policy outlooks are expected to be more divergence than the rest of the world and fairly priced into forward rates. This backdrop is expected to support the extension of the USD rally in the months to come, mainly against the EUR since the ECB prefers easing.
While the direction of the USD is broadly shared, the length of the rally and the conviction about the direction are highly contested. In this debate, we are more bearish than most on the EUR and more optimistic on the US dollar.
The market is on doubt that the US economy can endure the combination of higher rates and stronger US dollar and anticipates two-three hikes every other meetings.
"The main disagreement is about the length of the initial hiking path rather than the timing of the first hike. We believe that the Fed intends to deliver four 25bp hikes every other meeting when the cycle begins, reaching 1% in 12 months; furthermore, we think it will most likely succeed", says Barclays.
