Who will take on the Dollar?

3 February, 2017

The Federal Reserve squashed hopes of investors on Wednesday, leaving an ambiguous impression about its stance.  Sharing their views on the economy under “Trump era” regulators left interest rates untouched at 0.75% and were stingy with the hawkish hints, assuring that the economy warrants only gradual rate hikes. The forecast for inflation and unemployment has been improved – as compared with the previous FED message the phrase “inflation may reach the target level of 2%” has been changed to “inflation will reach the target level of 2% “, and the unemployment rate has been marked as “low”. Also, officials drew attention to the positive data on consumer confidence and business investments, which is not typical for the official’s rhetoric and rather is more suitable for economists on the Wall Street.

In general, we can say that in spite of the evasiveness in the clear outlook for a rate increase, the degree of caution in the rhetoric fell markedly. It was not the FED that triggered the selloff on Dollar but rather comments of Donald Trump that “the country does not need a strong Dollar”. The statement is in accordance with Trump’s intentions to expand the domestic production in the framework of a protectionist program and it will be much less competitive with a strong currency. Meanwhile, the consumption in U.S., which GDP largely accounts for 70% of its imports vice versa needs a stronger Dollar. An equilibrium price is difficult to determine considering these factors while considering the latent optimism of the FED. We expect the US Dollar to rise slowly but surely with the increased volatility caused by investors’ caution of the verbal interventions by Trump.

The probability of a rate hike in March, according to the futures on the FED Funds Rate increased from 31% to 32% but decreased slightly in the next month reflecting the pessimism of the market after the FED meeting.

The absence of unequivocal support from FED and verbal attacks from Trump forced the US currency to come off its peaks, falling against most major currencies. The index of the Dollar is preparing to test the 99.00 level while the British Pound expects Bank of England interest rate decision. BoE must make a difficult choice – to support the upward trend observed in the economy, or soften the landing after the country is officially out of the EU. Since on Tuesday parliament approved triggering the Article 50, which is the final stage of Brexit, regulators will need to prepare for the unpredictable consequences that may result in a caution of the economic forecasts.

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