The US Dollar firmed against its major peers on Thursday, with a lack of any significant news flow causing investors to turn their attention to next week’s Federal Reserve meeting.
The Federal Reserve is overwhelmingly expected to increase the target range for its federal funds rate again in the US on Wednesday, in what could be the first of as many as four 25 basis point rate hikes in the country in 2018. With financial markets currently fully pricing in another rate increase following a string of recent hawkish comments from a number of policymakers, the US Dollar will likely take its cue from the tone of communications in the accompanying material and, arguably more significantly, the Fed’s updated ‘dot plot’.
We think that a number of factors since the December FOMC meeting, when the bank last increased rates and released its quarterly economic projections, could mean that we see a modest upward revision to the bank’s rate forecasts. Notably, Donald Trump was finally able to force through his long awaited tax cuts in late-December, which could potentially lead to a faster pace of growth in the US this year.
The US labour market has also gone from strength to strength. Jobless claims are near 50 year lows, the unemployment is at its lowest level since 2001, while net job creation in February jumped above 300,000 for the first time in over a year-and-a-half. Rising trade tensions currently present somewhat of a risk to the outlook, although we do not think this will have any meaningful impact on the Fed’s hike projections.
Overall, we expect the Fed to adopt a hawkish tilt in Jerome Powell’s first meeting as the new Chair. It will likely continue to emphasise the strong labour market and that inflation should stabilise around the 2% target in the medium term. We see a good chance of an upward revision to the ‘dot plot’ to show on average four hikes in 2018 from the three previously anticipated, which should provide decent support for the US Dollar.
Sterling dips, Dollar rallies in quiet day of FX flows
Currency markets were fairly quiet during London trading yesterday. Sterling dipped against the Dollar as investors grew sceptical over the possibility of a smooth Brexit transitional deal being struck with the EU. The Dollar itself was modestly stronger following the release of an impressive New York Empire State Manufacturing Index which jumped to 22.5 versus the 15.0 consensus.
Next up will be the latest housing starts and building permits data in the US this afternoon. Updated Eurozone inflation could shift the markets, although no revisions are expected.