FxWirePro: DXY futures halts rallies after FOMC delivers as widely anticipated – Short hedge on forward guidance

If you plot DXY futures price chart of daily and monthly terms, the price rallies from last 2-3 (days and months) have halted at this juncture (refer above technical charts). While the US Fed hiked its key funds rates yesterday conforming to the common consensus. The target range for the federal funds rate now is at 1.75%-2.00%. Policymakers no longer expect that key rates will for some time remain below their normal levels. Starting in January, Fed chair Powell will hold a press conference after every FOMC meeting.

The Fed continued its hiking cycle as anticipated with its 25bp rate hike in the current monetary policy, conveying the target corridor for the fed funds up to 1.75%-2.00%.

The deposit rate on excess reserves was augmented only 20bp to 1.95%. This has already been flagged in the minutes of the May meeting and does reflect a technical adjustment to better keep the effective fed funds rate in the target corridor.

This decision was unanimous. The statement released after the meeting upgraded the Fed’s take on the economy and downgraded their worries about inflation. In addition, the phrase that the federal funds rate is likely to remain, for some time, below the expected longer-run level has been deleted, adjusting the forward guidance.

Nevertheless, the Fed still sees the stance of monetary policy as accommodative (which is small wonder since the mid-point of the target corridor is still roughly 100 basis points below the expected long run, or neutral, level).

Projections: The Fed released updated economic projections. Policy makers now expect an unemployment rate of 3.6% for the end of this year (previously: 3.8%). Next year, the unemployment rate should slightly decline to 3.5% and stay there. Since the Fed continues to expect above-potential growth for the foreseeable future, the projection’s inconsistency remains: Given the growth outlook, you would expect further declines of the unemployment rate. Inflation is expected to remain on its benign trajectory, with rates of 2% or minimally above for the next few years. The dot plot, policymakers’ view on appropriate key rates, now envisages a total of 4 rate hikes in 2018, one more than in March. For this change of the median, only one dot had to move up 25 basis points which hardly reflects a significant change of the projected rate path.

This month we also roll forecast out to mid-2019, with these new targets largely extension of prior trends.  Mid-19 EUR targets are 1.23, JPY 106, GBP 1.38, CNY 6.28 and MXN 18.75.  In aggregate, the broad dollar is still expected to grind a modest 2.5% lower from current levels over the next four quarters (3.9% vs the DXY basket) but is now no longer forecasted to print fresh cycle lows.

Hence, it is advocated shorts in DXY futures of near month tenors with a view of arresting bearish risks and enhance profitability.

Currency Strength Index: FxWirePro's hourly USD spot index is inching towards -91 levels (which is bearish) while articulating at 07:01 GMT.

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex

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