U.S. dollar index likely to pare gains amid prospects of ECB’s unveiling a QE exit plan, flattened UST yield: Scotiabank

The United States’ dollar index is expected to pare some gains and pull back amid the prospect of the European Central Bank’s (ECB) unveiling of a quantitative easing (QE) exit plan by July and a flattened United Treasuries yield, according to the latest research report from Scotiabank.

The Fed unanimously decided on Wednesday ET to raise the target range for the federal funds rate by 25 basis points to 1.75-2.00 percent as widely expected, in view of US realized and expected labor market conditions and inflation.

The Fed said in the post-meeting statement that "economic activity has been rising at a solid rate". In the May statement, however, the US central bank said that "economic activity has been rising at a moderate rate". Moreover, the Fed said "growth of household spending has picked up", compared to "growth of household spending moderated from its strong fourth-quarter pace" in May. The Fed deleted the statement that "Market-based measures of inflation compensation remain low".

The central bank further dropped the statement promising "the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run", after introducing it four years ago. Fed Chairman Jerome Powell signaled last month he sees less need for the Fed to continue providing guidance about the likely path of rates. Chairman Powell also announced there will be a press conference after every meeting starting in January 2019.

The change will make it more plausible for the FOMC to raise rates any meeting in our opinion, even though Powell said it does not signal anything. The Fed signaled two more increases are likely in 2018. It is expected to further flatten the UST yield curve together with a flat forecast of federal funds rate at end-2020 and over the longer-run, which would then undermine the DXY index particularly if considering the prospect of the ECB tapering going forward.

"We believe a rate hike in September is very likely given the hawkish forecasts. According to CME FedWatch Tool, Fed Funds Futures are now pricing in a 56 percent chance of at least two more rate hikes this year, compared to a 47 percent likelihood discounted before the FOMC meeting", the report commented.