The dynamics of the Dollar

17 February, 2017

William Dudley, the head of the New York FED, called for a rate hike in the coming months, but only if economic growth, accelerating inflation and low unemployment, will meet the development trajectory of the FED. In order to completely trust FED’s officials it is necessary to rule out the risks of Trump and the Congress, as they could interfere with reserves decisions raising big doubts. Strong Dollar is not something Trump’s protectionist plan includes and that is the main reason why FED’s forecasts should be treated with caution. Officials managed to convince the markets with three rate increases this year, as Dudley candour boosted this as the most likely outcome with the March increase at 31 percent.

The only thing that can break the FED’s forecast is a surprise in the fiscal policy, which is soon to be announced by Trump. Although, increase in the government spending and tax loosening will logically lead towards an inflation acceleration and is likely to boost the economic growth, then still the unexpected steps within the frame of his protectionist policies could backfire. Dudley and Yellen called the new government program a main source of risk that can disrupt the projections.

Retail sales and consumer inflation index released on Wednesday beat expectations, as they failed to compel the Dollar towards a further growth. It seems that after the ignored data on unemployment, markets bet on forecasts that exceed official ones and focus on completely other factors. Just look at the reaction of the stock markets and the Dollar on the recent comments of Yellen and Trump. Dynamics of the Dollar demonstrate the uncertainty, so investors do seem optimistic about the US economy and only project disappointment in the Trump´s plans. On Wednesday, Euro and Pound returned to the levels seen last week (above 1.06 and 1.25 respectively), apparently in anticipation of something more meaningful in fundamental data.

Obviously, expectations drive the US currency in the direction of growth, and we believe it will be the appropriate to go long on Dollar after the pullback is complete at 100.50.

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