Commenting on the market reaction to the FOMC’s hawkish shift this week, Rabobank analysts noted that the sharp rally in the USD on the back of this week’s Fed meeting suggests a sharp re-adjustment in positions has been taking place.
“It is possible that the Fed did too good a job in recent months in persuading the markets that it was wedded to the view is that all inflationary pressures would be transitory and that it was committed to average inflation targetting. Even though the inflation debate has been raging in the market all year, the disruption to asset prices sparked by the June 16 FOMC meeting is suggestive of how confident the market had been that the Fed would stick to its previous script. Instead Chair Powell this week warned that “inflation could turn out to be higher and more persistent than we expect”.”
“Ahead of the June FOMC meeting, the market consensus had been pointing to a gradual decline in the value of the DXY dollar index through Q3 and Q4 this year and an appreciating trend in the value of EUR/USD.”
“While we had not expected such a sizeable move in the USD this week, our EUR/USD forecasts have been counter consensus and we have been anticipating a stronger USD this summer. Given the possibility of a partial retracement in the USD’s move, for now, we retain our previous forecasts of 1.20 on a 1-month view followed by a move to 1.17 on a 6-month view. We will review these forecasts over the next week or so when the initial impulse from the Fed meeting has settled.”