USD expected to be firm – Natixis

In the week ended, the DXY dollar index remained stable, despite the Federal Reserve being a touch more hawkish than had been expected by the market, notes the analysis team at Natixis.

Key Quotes

“In particular, the Federal Reserve’s dot plot was unchanged for 2017 and 2018. In other words, the central bank intends to press ahead with its monetary tightening, with one interest rate hike this December and a further three in 2018. Also, the Federal Reserve’s balance sheet shrink will get under way in October. Finally, the central bank’s assessment is the currently weak inflation will be temporary and that inflation will recover back above 2% in 2018.”

“In this context, expectations of a hike in the Fed Funds rate in December have heightened, the probability climbing to 67%. On the other hand, the Fed Funds curve has not undergone much of a steepening in light of the Federal Reserve’s own dot plot, with just the one interest hike being fully priced in. It still seems, therefore, that the market has doubts over the Federal Reserve’s own scenario given the absence of upward pressures on earnings. After rebounding sharply in the immediate aftermath of the FOMC meeting, the US dollar resumed its decline at the end of the week.”