The interest rate increase was never going to be the story yesterday. The main driver of the dollar’s gains was upward revision to the projected interest rate path for the coming year, with this moving from 2 increases to 3. This is notable, for we have been through a period of many years where central banks, and the Fed in particular, have been forever downgrading and pushing further into the future their expectations of rate increases. So having the Fed become more hawkish on the outlook, at the same time that interest rates were increased, turned out to be a bullish signal for the dollar. There was, not surprisingly, very little to be said on the election result. Most members didn’t even factor in changes to fiscal policy to their outlook, given the uncertainties that prevail and there was a marginal 0.1% upward revision to the growth outlook for the coming year. The change to the implied rate path for next year was enough to add 1.5% to the dollar index and to add 12bp to the US 2Y yield. It was the yen and the kiwi that suffered most in the stronger dollar environment, with USDJPY stopping just shy of the 118.00 level.
With the Fed now over, we’re likely to see ranges and volatility taper off into the end of the year, but not in a steady and orderly fashion by any means. The Aussie has been an interest one of late and could prove to be one of the exceptions to this rule. The impact of the jobs data overnight was masked by the post-FOMC reaction, but the numbers did show a mixed picture of a rise in the unemployment rate and a better picture around the full-time/part-time split. Still, given the mixed picture on the economy and the higher yield on the Aussie, the currency could remain vulnerable to further dollar strength through the remainder of the year. For today, we have the UK BoE meeting and US inflation data later in the day. The BoE should be a non-event, with just a quick parsing of the statement required. Headline inflation in the US is seen rising to 1.7% (from 1.6%), with core inflation also seen rising by a similar margin, but impact will be nothing compared to the overnight moves.