USD: Supported by the Fed – Danske Bank

Morten Helt, senior analyst at Danske Bank, suggests that despite more subdued hiking expectations (cf the lower dots) the Fed ended up delivering the hawkish surprise including the USD support we were looking for.

Key Quotes

“Even if the Fed is now clearly preparing to become more data-dependent, the FX market reaction reflects the soft pricing going into the meeting following the hints from FOMC speakers in recent months.”

“On balance, Fed’s stance helps cement the carry appeal of USD for the time being, but we are closing in on a point in time where the FX market is sensing an end to the substantial Fed versus ECB divergence in recent years, which limits EUR/USD downside going forward, in our view. The cross is still set to be range-bound around 1.13 near term, but a kind reminder: USD is stretched on longs positioning-wise and undervalued on fundamental measures; this makes the greenback vulnerable to a Fed (as well as an ECB) shift. We are long USD carry at present but positioned for a EUR/USD rebound beyond Q1.”