We do not expect too deep a USD pullback - Westpac

"There are a couple optimistic tweaks here and there but otherwise the Fed delivered a steady policy message. The USD and yields have fallen, markets probably disappointed the Fed did not deliver a more decisive signal," Westpac economist Richard Franulovich wrote in a recent report.

Key quotes

Overall the Fed made a couple optimistic tweaks here and there but otherwise delivered a steady policy message, understandable given the imminent handover to Powell. Yellen reiterated that recent inflation softness is likely transitory and as such policy will continue to normalise gradually.

We do not expect too deep a USD pullback here. Tax cuts and continuing accommodative financial conditions should underwrite solid near term growth outcomes. The ECB is unlikely to deliver an hawkish surprises tomorrow while the BoE probably confirms it is not contemplating an immediate follow up hike. Europe has mostly navigated all the major political threats but it isn’t completely out of the woods – Germany does not have a functioning coalition yet while Italy faces elections in March 2018.

2018H2 is a different matter for the USD altogether – US mid-term elections could see Congress flip to Democratic control, upending Trump’s pro-growth agenda and there’s probably a hard stop to ECB QE in September.  The Fed should be clearly within the vicinity of neutral by 2018H2 too, raising the bar for hikes absent any genuine uplift in inflation.