German bunds climb tracking dovish FOMC statement, shrugs-off rate hike impact

The German bunds climbed during European session Thursday as investors tracked a dovish statement by the Federal Reserve at its monetary policy meeting held early today, while shrugging-off the rise in the federal funds rate by 25 basis points to 2.25-2.50 percent.

The German 10-year bond yields, which move inversely to its price, fell 1-1/2 basis points to 0.229 percent, the yield on 30-year note suffered nearly 2 basis points to 0.846 percent while the yield on short-term 2-year remained nearly steady at -0.595 percent by 09:45GMT.

As widely expected the Fed hiked its funds target range by 25bps – by unanimous vote – and lifted the interest rate on excess reserves by a slightly smaller 20bps. The forecasts accompanying the decision portrayed a slightly weaker outlook for near-term economic growth, a 0.1ppt downward revision to the assumed long-term unemployment rate (now 4.4 percent) and a 0.1ppt downward revision to core inflation across the entire forecast horizon (the core PCE deflator is now expected to end this year at 1.9 percent y/y, and at 2.0 percent y/y in subsequent years), Daiwa Capital Markets reported.

As a result, the median meeting participant forecast two further 25bp rate hikes in 2019 – one fewer than forecast previously – and the long-term assumed neutral fed funds rate was brought down to 2.8 percent from 3.0 percent previously.

In the accompanying statement and post-meeting press conference the risks around the outlook continue to be described as “roughly balanced”, with the statement adding the observation that the Fed “will continue to monitor global economic and financial developments and assess their implications for the economic outlook.”

This addition acknowledged recent weaker global data and ongoing risks to the outlook, as well as what Chair Powell described as “a little bit” of tightening of financial conditions. Powell emphasised that the changes to the Fed’s baseline outlook are relatively small and “have not fundamentally altered the outlook”. However, he emphasised that the actual path of policy will be dependent on future developments, the report added.

Meanwhile, the German DAX fell over 1 percent to 10,663.80 by 09:55GMT, while at 09:00GMT, the FxWirePro's Hourly Euro Strength Index remained slightly bullish at 90.86 (higher than +75 represents bullish trend). For more details, visit http://www.fxwirepro.com/currencyindex