Summary:

• The Fed plans to start balance sheet reduction since October
• The dot-plot still sees another hike this year
• The Fed sees no major impact of hurricanes on medium trem outlook

What we’ve just seen from the Fed could be quite positive for the US dollar. First of all, the very minimum for the US dollar has been met – the Fed decided to start balance sheet reductions from October:

In October, the Committee will initiate the balance sheet normalization program described in the June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans.

What is even more important, the dot-plot still signals another hike this year, most likely in December. We stress the fact that only 4 members of the Committee do not see this hike –  the same number as in June, whereas markets were nearly sure this camp would grow. There is a negative – estimates of the long run rates (which is a proxy for the 10-year bond yield) slid down a bit but that’s been communicated by the FOMC members already.

The dot plot still suggests many hikes going forward. Most importantly, the Fed seems to be convinced that a move in December should be executed. Source: federalreserve.gov 

Changes in macro projections are neutral on balance. Inflation projection for 2018 has been cut a bit from 2 to 1.9% but for 2019 it stays at 2% – a sign that the Fed isn’t too worried about inflation. Meanwhile GDP growth forecasts have been revised upwards. We can see in the statement that worries about too low inflation have abated somewhat as well. 

Changes in macro projections are neutral on balance. Source: federalreserve.gov 

The US dollar is recovering in a response to this message. We can see quite a substantial pullback on the EURUSD. The pair has just reversed from the key 1.20/1.2050 area and that could have huge impact going forward, especially if the bears could stick with these gains until the end of the week.  

EURUSD reverses from the key resistance. Source: xStation5