USD has fallen around 10% in 2017 despite rate hikes - Westpac

Analysts at Westpac explained that, in their opinion, markets are overreacting to the inertia in core inflation and negativity around Trump. 

Key Quotes:

"The FED has confirmed consistently that it expects inflation to approach 2% in the medium term. It emphasises considerable lags between tight labour markets and wage pressures. Both the unemployment rate and U6 (measure of underutilization in the US labour market) have converged on pre GFC lows. Labour force participation has recently lifted from a low of 58.2% to 60.3% still below the pre GFC level of 63.3% but much of this shortfall can be attributed to the ageing of the population."

"However, from our perspective, the outstanding opportunity for the FED is that despite rate hikes in December; March and June, financial conditions have eased. The Chicago FED’s index of financial conditions has fallen from –0.6 a year ago to –0.9 and is now easier than pre GFC levels of –0.78."

"The USD has also fallen around 10% in 2017 despite these rate hikes. We know the FED gauges policy “opportunities” partly in terms of prevailing financial conditions. With these “easy” conditions, the Chair must be sorely tempted to use the opportunity to lift rates further towards neutral and away from “emergency” levels. We are surprised that markets are only attributing a 40% chance of a December rate move."