USD strength renews if and when the Fed lifts off

A second important macro driver in H2 should be US monetary policy, the FOMC is expected to start the lift-off in rates, most likely in September. A Fed tightening cycle should not be especially menacing for global financial markets. 

A first hike has been well telegraphed by the FOMC, as has the message that the rate cycle will likely be gradual. Still, it is a little hard to predict exactly how financial markets will react to a first Fed hike, and a few reasons are seen by Barclays, not to be too complacent. 

First, as has been the case for some time, financial market pricing remains below the Fed's own forecast for the path of rates, though the gap has closed substantially since the end of 2014 (mainly from lower FOMC "dots"). Second, if lift-off does occur, it would be the first time in eleven years. 

As a recent Wall Street Journal story highlighted, some two-thirds of current traders were not around at the start of the last Fed lift-off. Third, judging from our Global Macro Survey, the "benign" Fed scenario is already well priced: the survey shows that a small majority expects a rate hike in September, but few see Fed policy withdrawal as a major market risk.