‘Dot plot’ weighs on US Dollar while other currencies and asset classes rally

Enrique Díaz-Álvarez21/Mar/2016Currency Updates

The Federal Reserve in the US struck a distinctly cautious tone at its most recent meeting. This is in line with the sentiment that the European Central Bank, the Bank of England and the Bank of Japan have expressed over the past two weeks.

However, what was significant was that the ‘dot plot’ indicated that Federal Open Market Committee members now expect fewer interest rate hikes for the year ahead. FOMC members said that they expected just two, rather than four, interest rate hikes in 2016.

This weighed heavily on the US Dollar. The Greenback dropped sharply against every other major currency and ended the week down about 1.5% in trade-weighted terms.

Financial markets worldwide benefitted from this perceived dovishness on the Fed’s part. Stocks, credit instruments and commodities rallied. Standard & Poor’s US 500 Index has now entirely erased the losses it had suffered this year so far. This was one of the main reasons why the Fed reduced its expectations for interest rate hikes this year.

Major currencies in detail:


The Bank of England’s March meeting gave markets little new information about the MPC members’ outlook.

The interest rate and QE targets were left unchanged, while the minutes struck a neutral tone, although for once there were few, if any, comments about the lack of UK wage pressures.

The UK labour report delivered more of the same. The job market continues to tighten, but this is not feeding through to faster wage increases. Unemployment remained steady at 5.1%, while the number of jobless claimants dropped again by a larger-than-expected 18k.

The March 2016 budget was somewhat of a non-event for the currency markets. As expected, Chancellor George Osborne insisted that the government remained committed to a budget surplus by 2020, but there were no dramatic spending cuts or tax increases in the works.

Sterling was one of the main beneficiaries of FOMC dovishness and the Pound rose by over 1% in trade-weighted terms in the hours following the release of the Fed statement.


Last week saw few macroeconomic data releases from the Eurozone.

We did get some decent news about industrial production, up 2.1% in January. We must note that the impact of a stronger Euro and weakness in global demand has not yet shown up in these numbers, and we expect the rest of the first quarter to be quite a bit weaker.

Regardless, the Euro was buoyed by the FOMC statement and rose very strongly against the Dollar, revisiting the upper reaches of the range which has held over the past 12 months.


As expected, the Fed left its target range for federal funds unchanged at a range of 0.25 to 0.5%. But notably, there was one dissenter calling for an immediate interest rate hike.

The press conference maintained a neutral tone, mentioning the global economic slowdown and financial volatility, but discounting its actual impact in the US economy as a whole.

Perhaps an important comment from Fed Chair Janet Yellen in the Q&A was that April remains a ‘live possibility’ for another rate increase. Markets are completely discounting this at the moment.

We now expect two US interest rate hikes in 2016, in line with the FOMC ‘dot plot’. However, we note that markets continue to price in a much lower path. We expect upward pressure on the Dollar once these unrealistic expectations are corrected and brought closer in line with the Fed’s view.

Nevertheless, it‘s clear that the upward path for the Dollar will be more gradual than we had previously expected and we’ll be revising our timetable.


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Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.