• Here are the four main takeaways we got from the Fed: (1) DOVISH. no reason to expand here! (2) AFRAID: the over-arching message seems to be a re-assessment of the impact of higher rates. (3) DIFFERENT: Unlike the BoE and ECB, the Fed is willing to put it’s money where it’s mouth is and actively fight the back-up in rates. (4) UNPREDICTABLE: the Fed’s decision-making framework is not stable. The 7% unemployment threshold for QE is no longer valid.
• The US yield curve is bull steepening, which is undeniably bearish USD across both EM FX and G10. USD bulls are seen taking a leave of absence until the tapering story reasserts itself, so no point in fading the move too early.
• In G10 land the Fed surprise is likely worth another 2% USD weakness against most pairs, with the notable exception of a more resolute USD/JPY. The new attempted sell zone on EUR/USD may come in at the year’s high at 1.3711, as the DXY heads to and tests major support near 79.
• NZD/USD andAUD/USD should be among the outperformers in the near-term given the extent to which the Fed tapering/bond flow reversal themes had weighed until recently. A further rally in NZD/USD to its 2013 high at 0.8675, and AUD/USD to our year-end forecast of 0.98, look increasingly likely. Outside USD crosses, commodity FX should also do well against JPY
Read the full report: FX Daily
Deutsche Bank