Credit Agricole CIB FX Strategy Research argues that despite the initial market reaction, the FOMC minutes should not have a lasting negative impact on the USD.
“Overall, “most” participants thought it was appropriate to hike “soon” if data came in line with their expectations. In our view a June rate hike remains very much on the table and markets continue to price in a 75% probability of a move,” CACIB adds.
As such, CACIB thinks that the initial negative reaction in yields and the USD was probably driven by the somewhat more cautious than expected approach to balance sheet tapering where the Fed would gradually increase the caps on the run-off amounts.
However, CACIB believes the immediate relevance of the balance sheet plans for FX is somewhat limited as the focus is on whether the market is willing the re-price hikes in the fed funds rate beyond June.
“We believe that the Fed’s confidence in the economy should translate into a steeper front-end of the curve and a stronger USD once Q2 data rebound materializes as we currently expect,” CACIB argues.
Source: Credit Agricole CIB Research
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