Treasury Yields Have Lift Off

US treasury yields are soaring today on the back of a firmly hawkish FOMC meeting yesterday. Heading into the meeting, there split expectations regarding how the Fed would approach the meeting given attention being placed on rising yields and inflation expectations. However, seemingly in keeping with its message that the central bank is not concerned by the rally in yields, the Fed’s message was one of solid optimism, despite sticking to its claim rates will not be lifted until at least 2023.

Economic Forecasts Sharply Higher

Traders were particularly keen to receive the next set of economic projections from the Fed, having not received such forecasts since December. These were decidedly bullish for the Dollar with GDP, inflation and unemployment all forecast to improve at a quicker pace than projected in December. The Fed now sees GDP hitting 6.5% this year, from 4.2% in December with inflation pegged to hit 2.4% this year, up from 1.8% in December. Additionally, the unemployment rate is now expected to fall as low as 4.5% this year, down from the 5% estimate given in December. Projections were also lifted across the 2022 horizon from the estimates cited in December.

Dot Plot Lifts In 2022

Along with the sharp increase in economic projections for the year ahead and beyond, the fed’s update “dot plot” forecasts were also notably skewed to the upside. Four Fed policymakers now forecast a rate hike in 2022, up from just one in December while seven now see a hike in 2023, up from five previously. The trajectory is certainly encouraging for the percentage of the market that feels the Fed is holding back on hawkish projections, anticipating that a rate hike will certainly come sooner than the 2023 target the bank is currently citing.

Upside Risks in Outlook

Looking ahead, Fed chairman Powell was a little more concessionary around inflationary risks citing the projected spending surge that is anticipated to occur as the economy reopens. With this in mind, and likely referring to the impact of the new stimulus bill, Powell also said that really strong data should be coming with inflation likely to step up in March and April. However, Powell still sees the inflation spike wearing off quickly. However, one particularly telling comment with raged to the uncertainty in the outlook was Powell’s admission that “we haven’t come out of a pandemic before, we haven’t had this type of fiscal support.” Up to now, it seems the conversation has been around downside risks in the outlook whereas now, we can see for the first time that the risks are shifting more to the upside, suggesting that a bullish USD reversal could soon be on the cards.

Technical Views

DXY

The Dollar index is still caught between correction and base mode following the breakout above the bearish channel. Price is hovering around the 91.74 level which is a key pivot here; above, and there is room for a test of the 82.82 level and a broader recovery towards 94.38, below and this starts to look more like a correction especially if 90.50 is broken again.

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