Significant change to Fed forecasts to impact USD direction – BNPP

By FXStreet Research Team at BNP Paribas, suggests that the financial markets remain in the grip of severe risk aversion and against this backdrop current account surplus-backed currencies continue to extend gains while receding Fed expectations undercut the USD generally.

Key Quotes

“The US money market curve is flirting with pricing risk of policy easing, a possibility the Fed Chair did not dismiss outright in her Senate testimony even if she continued to emphasize it is not her expectation.

In response to the tightening of financial conditions we have observed over the past month, our economists have made significant changes to their Fed forecasts and now no longer expect the Fed to hike rates in 2016 or 2017. Essentially, we expect the fragile risk environment to preclude tightening in H1 and slowing activity to argue against further rate hikes thereafter.

The shift in Fed expectations clearly has big implications for the dollar outlook and we are currently reviewing our USD forecasts accordingly. For now, the funding currencies are likely to remain well supported and the USD on the defensive, though markets will remain wary of action and comments from other G10 officials, particularly in Japan where verbal warnings are possible as officials return …read more

Source:: FX Street