Our view for today’s Fed rate announcement is that the risks are broadly balanced for the dollar, and we see limited scope for a surprise driving major FX moves, ING’s FX analyst Francesco Pesole notes.

Fed to hold in January and to move in March

“The prospect of fiscal stimulus among other promised policies by US President-elect Donald Trump will, in our view, force some scaling back in expected rate cuts included in dot plot projections as rates are cut by 25bp, matching pricing and consensus.”

“Even if the communication nuances end up delivering some sort of dovish surprise, we doubt the Fed will derail from a generally cautious stance on guidance, which inevitably leads the markets’ own expectations for Trump’s policy mix as the main driver for rate expectations. This means that any potential USD correction should not have long legs. Also remember that January is a seasonally strong month for the greenback, and markets may be lured into building strategic bullish USD positions as Trump’s mandate kicks off.”

“Our baseline view for today is that the modest hawkish readjustment in Fed communication will leave markets content with current pricing for further Fed meetings: a hold in January and around 50% implied probability of a March move. Ultimately, that can leave the 2-year USD OIS at the 4.0% mark and DXY close to 107.0 into Christmas.”