The FOMC meeting threw some warm and cold water yesterday. On the hawkish side, the statement noted that “The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate...” (kind of hawkish). Perhaps on the slightly more dovish side, it also noted the slowing in economic momentum in Q1 whilst also referencing to the “symmetric” nature of their target which some analysts suggested that the Fed is willing to let the inflation exceed the 2% target. The FOMC outcome was ‘neutral’ on the dovish-hawkish scale, leading market participants, after a quick test on the upside for stocks and downside for the dollar, to return to the dominant theme of the week; the ongoing surprising dollar strength and wobbling equity markets (Equity sector performance). This left us ruminating on the causes for dollar strength (dwindling dollar liquidity + large shorts) and perhaps more importantly on the possible consequences of a further dollar rally (decline in capital markets?).
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