FxWirePro: Brexit outcome hinders US Fed’s hiking cycle in H2 2016

On the result day of Brexit referendum, the global markets buckled up as Britain’s vote on European Union membership infected almost all asset class.

The Brexit camp winning with scores of 51.9% votes, the United Kingdom has had a significant faction of eurosceptics ever since it joined the EU in 1973. But until recently, this was a minority position.

"There are nearly 130 Conservative MPs who have declared for leaving the EU.

The US not immune to a slowdown in Europe. At the June FOMC meeting, Fed chair Yellen said that a ‘Brexit’ ‘could have consequences’ for the US economic outlook and financial market developments.

The European debt crisis in 2011-13 also hit the US, which slowed down markedly. During this period, Fed launched QE3 to support the economy.

Fed will monitor incoming data thoroughly to analyse the impact of Brexit on the US. We expect US economy to slow but to avoid recession.

We now expect the Fed to stay on hold at least for the rest of 2016.

If easing is needed, the Fed will likely cut rates down back to 0.00-0.25% and start a new round of QE. The Fed seems to prefer not to lower rates down to negative territory.

Fed chief struck a cautious tone during the press conference, stressed that the Fed’s “policy is not on a pre-set course” and that projections made by the committee are not promises. Yellen also said that the rate could be reduced to zero in the event of any shock to the financial system. The Statement continues to reiterate that the Fed remains data dependent. 

Interest Rates: The downgrade to FOMC members’ projections for economic growth, inflation, and interest rates provided a supportive backdrop for interest rate markets.

Hence, we reckon the market is now only pricing a full Fed rate hike by Q4-2017.