Violent reaction to Fed

Markets reacted violently to the Fed - though "patient" was dropped as expected, the market took everything else very dovishly.

US 2 year swaps dropped almost 15bps to 79bps (now 82bps) and Fed fund futures pushed back the expected first hike right until December. 

But the moves in FX were much more aggressive still - EUR/USD squeezed up to a high of 1.1052 (spot 1.0870), with other USD pairs seeing similarly outsized moves (USD/JPY low 119.29, spot 120; USD/CAD low 1.2446, spot 1.2540/50; AUD/USD high 0.7849, spot 0.7780; NZD/USD high 0.7549, spot 0.7490). GBP/USD recovered off an intraday low of 1.4635 (having traded lower on earlier UK news) to hit 1.5174 (spot 1.4980). 

Where does all of this leave us? 

There was something for everyone in the statement and Yellen's press conference. The growth and inflation forecasts were revised lower, with strong USD one factor in that decision though when asked on USD strength in the press conference, Yellen said it is a factor holding down import prices and net exports will be a drag on the outlook but that it must be put in the context of other things affecting the US outlook, that the Fed is expecting above trend growth despite the strong USD effect, that the Fed overall sees sufficient strength in private spending and that currency strength also reflects the strength of the US economy. 

So what did the market react to so dovishly? 

Many mentioned the dots - specifically the cut in dot forecasts. According to RBC Capital Markets, if we assume relatively stable IOER/RP spreads, the median dots would suggest a 2yr at 1.02% (that is down from 1.45% using the old dots). 

But even with the step down in the dots, there is still an absurdly large dot/market gap and it is odd for markets to ignore the dot level but not the dot change. 

All of which is to say the post-Fed moves look like an overreaction. RBC's technical analysts now say they are looking at a bullish short-term trend reversal in EUR/USD that opens up 1.1016 and 1.1098 on the topside but fundamentally they like layering in to a EUR/USD short at spot and adding to the position between 1.1050 and 1.11, targeting an eventual move to parity.