FOMC: Dovish reaction function – TDS

Analysts at TD Securities explain that based on Fed Chair Powell’s comments at his January press conference, the FOMC has pivoted in a determined way to a more dovish position on both interest rates and the balance sheet. 

Key Quotes

“As a result, we are now shifting our expectation for balance sheet runoff to conclude in June, with one more rate hike this year (and this cycle) to 2.75% in September.”

“We expect USD softness to extend but with G3 central banks extricating themselves from the policy limelight, differentiation will be key. Indeed, the EUR remains directionally conflicted, leaving the JPY as the default “anti-USD” and hedge for an uncertain outlook. We expect USDJPY to grind lower but to keep within established ranges. The “Powell Put” has been firmly planted however, which should help keep risk conditions supported for now, and having us look for AUD to tactically extend gains on the crosses.”