Fed rate's hike expectation shifted to December 2015. However, this prediction is only based on uncertain factors whose recovery are still doubted by the time December comes.

Post-FOMC this September, Fed rate's hike expectation shifted to December 2015. However, this prediction is only based on uncertain factors whose recovery will be likely still in doubt by the time December comes.


US Inflation

On September 17th, Federal Reserve decided to cancel rate hike due to current volatility on financial market and worrying economic condition in developing countries. Also, another reason came from US inflation that is still steady at low levels. Quoting the released statement after FOMC, Recent global economic and financial developments are likely to put further downward pressure on inflation in the near term.

US US PCE Inflation Chart (yoy)

According to the trend, PCE inflation, which is often named as Fed's reference to establish their policies showed failure in reaching the 2% target. Thus, with the voting result of 9:1, FOMC left interest rates unchanged again at 0-0.25% in their 16-17 September meeting. It needs to be noted that FOMC 2015 has been known for its dovishness.

According to latest dot-plot chart that was released along with the Fed's announcement, 13 of 17 Fed members predicted that they will increase rates at least once before this year ends. This dot plot is Fed version of forecast for benchmark rates.

Dot Dot Plot chart based on FOMC September 2015

The dot plot showed that the majority of Fed members expected interest rates to be at 0.4% in the end of 2014, 0.15% higher than the current Fed rate, which is positioned at 0.25%. On the other hand, FOMC will hold two meetings before this year ends, one in 27-28 October, and the other one in 15-16 December. Press conference is not scheduled for October meeting, so analysts move their expectations of rate hike to December. Yet, there is only a slight chance for inflation to improve significantly in October or in December. If inflation remains to be the main reference, dot plot will be the only thing that is changed again, while Fed rate will be kept as it is.


Global Economy

Supporters for December's rate hike range from Wall Street to retail forex analysts. One of them is French finance consortium SEB Group that stated improvement on global economy as the reason for Fed to consider rate hike. According to SEB Group, if we see the current US economy, rates at the crisis level are no longer needed. Yellen also admitted yesterday that keeping interest rates at low levels for longer periods would not be good for the economy. So the current question is, according to them, global economy condition which probably will not be conducive even for December's rate hike.

Facing such projections, USD gains against major pairs at the beginning of this week is unlikely to maintain its hold. John Kicklighter of DailyFX noted in bold yesterday that Fed rate's prospect for December has gone down from 70% to 36%.

So, does that mean Greenback will move in bearish rally? Not necessarily. The US Dollar's appeal, in turn, will be influenced by other central banks' decisions regarding QE's expansion (ECB and BoJ) and rate cut (BoE). The lack of confirmation from Fed side will keep market to continue their speculations while also keeping a lookout on US economy data, and development in China stock market that previously became the trigger behind global market panic. Up to next December's FOMC, Greenback will be possibly full of uncertainty against other major currencies.

Looking from fundamental schedule, a number of Fed officials will deliver their speech this week. Two of them are FOMC members who have rights to vote: Janet Yellen and Dennis Lockhart. They are well-known for their dovishness, hence making it possible for USD to retrace back to last week's lowest level, especially against Euro and Japanese Yen. On the other side, China's Caixin Manufacturing PMI has become a new popular indicator following the heightened tensions related to China's economy weaknesses. The data may turn into speculation material as FOMC cited Fed concerns over global economy condition.