That’s going to leave a mark
Overnight the Federal Reserve published its latest monetary policy decision. The relentless appreciation of the Dollar lately has been driven by the combined narratives of a soft landing, US economic exceptionalism, the forthcoming Trump presidency and the belief the Fed may have to moderate its easing cycle accordingly. The missing piece of the puzzle was confirmation from the Fed itself that it, much like the market, concurred that the previous path of monetary easing was now excessive.
The usual caution that surrounds central bank communications usually leaves the outlook sufficiently blurry to afford central bankers a margin of error. The Dollar, although strong moving into yesterday’s Fed decision, had not been bought excessively leaving scope for additional Dollar longs to build if the Fed exhibited a high degree of relative hawkishness. Despite following through with the projected 25 basis point cut last night, it was the combined impact of Chair Jay Powell’s press conference and the latest projections from FOMC policy members that drove the Dollar significantly higher overnight.
The 100-basis points of easing the Fed has delivered since September was largely discounted from the Dollar overnight. The change in projected cuts for 2025 from 1% at the September meeting to just 0.5% implied by the latest median forecast has driven the Dollar and treasury yields higher. The change to the projections has in turn been driven by higher inflation forecasts as measured by the Fed’s preferred core PCE deflator. EURUSD parity, although still a long way off, is an increasing reality once again.
Discussion and Analysis by Charles Porter
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