USD strength after Hawkish ‘dot plot’ shift

The latest FOMC meeting saw a hawkish tilt that the market had not been expecting. Going into the meeting there was anticipation that a hawkish outcome could involve projections for a 2023 median rate hike. In the end, the dot plot saw more members opting for earlier rate hikes in this meeting than last.

  • June meeting – 7 saw hikes in 2022 – 13 saw hikes in 2023
  • March meeting – 4 saw hikes in 2022 – 7 saw hikes in 2023

This sent US 10 year yields higher, the USD higher and gold and the EURUSD lower.

Other hawkish elements

In the press conference Fed Chair Powell recognised that ‘inflation could turn out to be higher and more persistent than we expect’. This is a nod to the recent strong run of CPI data that has come out. Some in the Fed are clearly concerned that inflation may not be transitory. However, although the inflation projections for this year for Core PCE rose to 3.0% from 2.2% the 2022 forecast was only revised slightly higher to 2.1% and the 2023 forecast remained unchanged. This means the core Fed message is that the majority still expect inflation to be transitory. Powell pointed out that the forces weighed on inflation for the last 25 years are still in place.

Powell was upbeat surrounding the labour market stating that ‘it is clear we are on a path to a very strong labour market’.

Bearish elements

Fed Powell stressed that the recovery is still incomplete and the pace of the labour market improvement is uneven.

What about Bond tapering?

Well, clearly with rate hikes being pencilled in sooner we are moving closer to talk about bond tapering. Powell said that this June meeting was the ‘talking about talking about’ tapering meeting. Powell said that it will be ‘appropriate to consider a plan for tapering at the coming meeting if progress continues’. So, the next Fed meeting is clearly looking like the time to talk about a tapering plan.

The takeaway

Dollar strength and gold weakness. USDJPY longs look good on retracements and any moves back up to $1860 in gold look very good for sellers, For the USDJPY pair keep an eye on us10 year yields and for gold keep an eye on real yields.

Gold and real yields

USDJPY and US 10 years