Market News & Insights
15 December 2016

Analysts Connect the Dots

As expected last night the Fed raised interest rates by 25 bps to 0.75 percent. It was a unanimous decision in the end and had been all but priced in before the announcement. After the headline announcement analyst’s attention quickly turned to the Fed’s ‘dot plot’ which is part of the FOMC’s Summary of Economic Projections. Of late the Fed have been playing their cards close to their chest offering the market very little in terms of forward guidance. The dot plot however provides us with an individual forward curve of the interest rate expectations for each of the 17 members of the FOMC who anonymously provide their medium term predictions for the fed funds rate. When this was last generated in September it projected the potential for two rate rises in 2017, however this has now been pushed to three in the latest plot. This saw trader’s rush to the dollar where we finally saw EURUSD break 1.05, a level that has proved almost a stopping for the pair in the past. The 1.0460 looks to be the next key area of support for the cross. The US dollar index also hit its highest levels since January 2003, while US Treasuries got a bump with the 2 year yield hitting its highest level since 2009, above 1.26%, up 10 basis points.

It all seems a bit like déjà vu when you consider we were in a very similar situation this time last year where the dot plot was projecting a faster path of trajectory with four rate rises for 2016. This misjudgment however doesn’t seemed to have dampened the Fed’s spirits. The Fed’s projections showed little change from the September statement for the outlooks in growth, unemployment and inflation over the next three years. So perhaps it is the Trumponomics effect playing a factor here for the increased optimism, with Trump pledging to fuel growth with tax cuts and increased spending on infrastructure.

In the UK economic data remained broadly encouraging yesterday with wages rising 2.5% in the three months to October and in the process just about maintained a positive gap between wage growth and inflation, while unemployment came in unchanged at 4.8%.

Later on today we have the final Bank of England meeting of 2016 which is likely to see rates remain on hold. The BoE have been more vocal when it comes to forward guidance, albeit at their to their detriment at times, however we may see them take the prospect for further rate cuts are off the table for the foreseeable future.