The Sellside Reacts: “Fed On Autopilot” To June Hike, But Dollar Bulls May Be Disappointed

As expected, there were no fireworks in the Fed statement which on balance was rather hawkish thanks to the Fed’s explicit assurance that recent weak data was “transitory” (we wonder how the “data-dependent” Fed will react if the weakness is not transitory). And as the Wall Street reactions start trickling in, the consensus is that the Fed remains on “autopilot” until June, when it will hike once again.
And while the dollar is stronger, Citi’s Todd Elmer made an interesting observation, namely that “if anything the knee-jerk response to the statement saw USD selling. While this very modest move has since unwound, this suggests that market lean was not quite as dovish as recent softer data flow might suggest. The forward looking implications are two-fold: 1) It may take a much more significant shift in signals from the Fed either on rates or the balance sheet to see investors add to expected tightening in the quarters ahead. With limited incentive for the Fed to induce such a move, we doubt that this factor will offer USD much support for the time being. 2) This may denote a more hawkish lean into the data later this week.”
Citi’s conclusion – the dollar may be prone for a selloff: “The elevated payrolls forecast is partly a function of presumed seasonality and payback, but insomuch as this points to investor willingness to shrug off recent weaker indicators, this points to potential for USD-negative disappointment”
First, here is Citi’s Todd Elmer:
Fed on autopilot
Today’s policy statement is unlikely to drive many ripples in the market, so the likelihood is that we will continue to see broadly range bound trade until the heavier hitting events later this week. Specifically, speeches by Fed Vice-Chairman Fischer on monetary policy and other Fed officials, as well as the payrolls release are far more likely catalysts for moves in FX. The former provides more freedom for the Fed to offer nuanced shifts on forward guidance than is possible in the constrained policy statement, while the latter will be seen as a key marker on whether or not the recent soft patch in data flow is extending.

This post was published at Zero Hedge on May 3, 2017.