ETF Securities Research Blog

US Dollar setback after the FOMC, followed by a rebound.

US Dollar setback after the FOMC, followed by rebound. We expect the Fed will raise rates at its December meeting (on Wednesday), but the tone of the statement and Chair Yellen’s press conference will be more neutral than previous rhetoric from Fed Governors, forcing the US Dollar (USD) lower.

As a result of more toned down Fed rhetoric, we expect that the USD could experience a near-term setback on a ‘buy the rumour, sell the fact’ move after its second rate rise in its current tightening cycle. While a rate rise is currently fully priced in, we feel the market is overpricing the chances of the Fed raising its ‘dot plot’ for next year. We believe the Fed will retain the same ‘dot plot’ for rate hikes in 2017 (currently two hikes predicted) and strike a more neutral tone in its statement and at Chair Yellen’s press conference. With the Fed willing to run a ‘high-pressure’ economy next year, we expect the USD to suffer in Q1 as the central bank begins to lose its inflation fighting credibility.

Strong economic data, particularly the ongoing buoyancy of the jobs market has driven the US Dollar higher in recent months against all G10 currencies. Investor positioning has surged since mid-October and is at the highest level since August 2015. This could quickly unwind – on a real yield differential basis the USD is currently beginning to look stretched against G10 currencies.

With Trump policies likely contributing to inflationary pressure, alongside higher wage growth and upwardly trending core inflation factors like healthcare and housing, we feel the Fed will need to change its projections and be more aggressive in its tightening profile than what is currently envisaged. As the Fed comes to terms with having to be more active with monetary policy in mid-2017, we feel the USD could stage a rebound in the second half of the year.


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