Fed decision won’t change dollar outlook
The Federal Reserve is expected to signal a December rate hike later. But the move is already priced in and expectations for future hikes haven't changed in the wake of the midterm elections, suggesting that meaningful dollar gains are unlikely
USD: FOMC doesn't alter current risk environment
The focus shifts to the FOMC meeting today. While rates are widely expected to remain unchanged, the FOMC remains firmly on the course of tightening and should continue to signal “gradual” rate hikes ahead, setting the markets up for a December move. But with the December hike priced with an 80% probability and another two hikes priced in for 2019, the bar for the FOMC to send the US dollar meaningfully higher today is set very high, particularly after the outcome of the US mid-term elections which suggests a lower likelihood of more fiscal stimulus (see US midterms: a case of the blues…) and thus an even more hawkish Fed.
Still, the overhang of a strong US dollar for months to come should act as a brake on more pronounced and longer lasting emerging market FX gains. While the across the board rise in equity markets is supportive for this asset class, rising US funding costs and a firmer dollar are not. Yet for the short term, our tactical preference remains for emerging market high yielders rather than G3 low yielders (vs USD), as the former benefits more directly from rising stock markets.
EUR: Staying firmly below the 1.1500 level
In line with the wider global FX trend, the post US midterm elections spike in EUR/USD stalled, with the 1.1500 level acting as firm resistance. With the Fed unlikely to change its course and forward guidance today, EUR/USD upside is fairly limited. From a short-term perspective, we see EUR as a good funding currency for tactical emerging market FX longs (see yesterday’s FX Daily). In Sweden, the Riksbank’s Stefan Ingves and Martin Floden speak in open hearings on monetary policy today. We expect them to remain non-committal on the exact timing of the first rate hike (ie, either December 18 or February 19). The reaction of EUR/SEK should thus be limited.
RSD: Central bank to stay on hold
With core inflation muted at 1.1% in September, and the headline rate quite well-behaved at 2.1% (from 2.6% in August), the National Bank of Serbia has little reason to change its stance today. No impact on the Serbian dinar is expected and the EUR/RSD should remain stable without too much central bank support.
HUF: Higher CPI a modest short-term negative
Our economists expect Hungarian October CPI today to rise to 3.7% year-on-year (vs the 3% target and 4% upper tolerance band) on the back of energy and food prices, with core inflation remaining roughly unchanged. While the knee-jerk reaction may be modestly negative for the forint (HUF), as the inflation targeting credibility of the National Bank of Hungary may be questioned again, we don’t look for pronounced weakness, as CPI should move lower in the following months and the central bank has already announced a gradual roadmap towards policy normalisation. Coupled with meaningful short HUF positions, EUR/HUF upside should be limited and bound by the 323.00 level.
"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.
This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.
The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.
Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.
ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).