20 December, AtoZForex.com, London – On Wednesday the Fed raised interest rate by 25bp increasing the range to 0.25 – 0.50%, exactly seven years after the Committee eased the policy to the range low of 0 – 0.25%. With the beginning of the tightening cycle out of the questions, the market has turned it’s focused. Namely, will Fed hike 3 times?
Interestingly, all of the G10 central banks with an exception of the Bank of England (BoE) have been less dovish than anticipated. “This suggests that central banks are less worried about the deflationary risks from the collapsing oil price than what many have expected,” Danske Bank added.
Moreover, the Fed hike has eased the uncertainty for the markets, especially for the EM, which were pressured by Fed interest rate expectations.
Consider reading: 2015 summary & 2016 outlook
Will Fed hike 3 times?
With the beginning of the tightening cycle out of the questions, now we ask how many time will the Fed hike?
“We stick to our view that the Fed will hike three times in 2016 and four times in 2017, i.e. a total of seven hikes until year-end 2017,” Danske Bank projects, specifying that “we expect the Fed to hike in April, September and December next year.”
Danske Bank expects the USD to strengthen gradually against the EM and commodity currencies in upcoming months, as the currency market prices more US interest rate hikes, currently only two are priced in, while staying focused on the devaluing crude oil price.
Meanwhile, EURUSD is a different story, as stretched positioning is expected to mitigate the downside.
“We expect EURUSD to range trade between 1.05 – 1.10 over the coming three months as the market prices in a slightly more aggressive Fed. On 6 – 12 months, we expect EURUSD to rise sharply towards 1.16,” Danske Bank projects.
The rally should follow as consequence of the market realising that the end of ECB easing is near, and as we an undervalued EUR itself.
Alternatively see: Goldman Sachs technical EURUSD & EURJPY analysis
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