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Reactions to the statement was generally muted to begin with as altering the economic projections was expect and the move to more qualitative guidance numbers on unemployment was also factored in future funds rates and the USD.
However, the strength developed as the economic projections for the Feds funds rate rose by more than expected to 1% by year end 2015 and 2.25% by the year end of 2016. This is the most hawkish call on rates from the FOMC in recent memory and shows all parts of quantitative easing are on the table. What also ramped up USD strength was Janet Yellen’s equation of ‘considerable amount of time’ to mean six months; that means the prospect of rate raises are sooner than expected.
Sizeable USD bids were seen in USD/JPY as deal flows in late New York trade reacted to the news – the silver lining is it should be Nikkei positive as AUD and NZD saw sustained selling pressure even after neutral and hawkish calls from the respective countries over the past week.
The chart of the day remains USD/CAD as central bank differentials remain a key driver of the pair. The hawkish to dovish ratio continues to move further apart as the commodities-driven Canadian economic sees softness and the BOC talks of rate cuts, compared to the Fed which is now expected rate rise on the strengthening US economy. The breakout looks telling (see below).
We expect the USD strength to continue against the risk pairs in the G-10 as this statement was a real sign the Fed sees real growth in the US economy. That will mean the USD will see the return of the investment funds that have been fleeing to gold and JPY of the last three months due to the adverse US winter and back in the greenback.