FX FUNDAMENTAL ANALYSIS
due to increased issuance of US government bonds and message from Fed that tightening in the short-run is likely to temper inflation and growth.
Figure 1: S&P 500 Daily Chart
policymaker’s prediction and is not sanctioned by the FOMC. He also highlighted uncertainty around Fed’s assessment of the economy. All in all market realized that expectations of four rate hikes in 2018 are unrealistic
(given how
leveraged the global markets are) and uncertain (due to limitations to Fed’s knowledge).
Another impact of the meeting was bull flattening of the yield curve (shown in figure 2): largely
In our view, Powell did well and impressed many in his first meeting as Fed Chair but still failed to provide answers on what market should look for forward guidance instead of dot plot. Hence, all the investors took from the meeting was that three rate hikes are more likely for 2018 than four rate hikes (as the dot plot suggested). That said, Powell is gearing towards gradual rate hikes that will keep inflation and growth in check and will help reduce the size of the balance sheet gradually.
The problem however is most likely to come in raising interest rates quickly if inflation rises faster than expected. For that there are no answers because it will be near impossible to raise rate faster while still ensuring a healthy financial markets given the leverage. In our view, Powell believes that recent interest rates hikes will be enough to ensure a gradual inflation rate path and this
is why he wanted
to temper market expectations regarding four rate hikes this year.
Rahul Khanna Figure 2: US 10-year note (Daily Chart) Source: Reuters
Chief FX Strategist Tradermade
16 FX TRADER MAGAZINE April - June 2018
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