FOMC rate decision and outlook in spotlight

The US dollar index and regional equity markets were steady ahead of the Fed’s interest rate decision tonight. Against a backdrop of solid US economic data, an improving jobs market and changes that the Trump administration could potentially bring to the capital markets, the expectation of a 25bps rate hike by the Federal Reserve hit 100% several weeks ago. It seems that a December rate hike is in no doubt. The US dollar has strengthened against major currency peers such as JPY and EUR since mid November, leading to massive outflows from emerging markets. 

Investors believe that some of Trump’s main policies – including infrastructure spending, massive tax cuts and financial environment deregulation – will promote economic growth in the long term. As a result, expectations of long-term inflation rose substantially along with the treasury yield curve, which gives the Fed more reason to accelerate the rate of the normalisation program in the future. 

So the biggest question surrounds what the Fed will do next? Consensus shows two rate hikes in 2017 and three in 2018, and ultimately it will depend on the US economy and global markets. In the event that the FOMC statement tonight is more hawkish than expected, the dollar will likely get a boost. Based on past experience, however, Ms Yellen might maintain a cautious view, until solid economic data provides more evidence to support future rate hikes. 

Technically, the US Dollar Index is ranging between the 100.2-to-102.1 area. It was quite flat these last two days as expectations have been more or less priced in previously. 102.1 remains a key resistance level in the near term. 

US Dollar Index Dec 2016

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