As the Fed continues to hike interest rates, has the outlook for the dollar turned another corner? We take a look at the outlook for forex, equities and commodities in the coming days. Non-farm Payrolls will be in focus.
To the casual observer, it might seem that renewed dollar strength came following the Federal Reserve increasing interest rates again on Wednesday. The Fed firmed up expectation for a December rate hike (to make four this year) whilst the dot plots also suggest a further three in 2019 and one in 2020 as the tightening cycle comes to an end. All fairly hawkish you might think. However the market has been fairly well guided in expectations for this as the path. In fact the FOMC meeting gave us very little new information, and what it did give us was possibly even bordering on the dovish. Removing the “accommodative” section on monetary policy from the statement suggests the Fed is close to a neutral rate (given that interest rates are now a shade above core inflation). Also the Fed is not taking into account the trade tariffs yet in its forecasts either, even though there is anecdotal concerns at a local level in its Beige Book. It was interesting to see Treasury yields did not rise on the Fed decision, suggesting that the dollar strength was not Fed driven. Instead the strength in yields of recent days seems to be due to the risk aversion move sell-off on the euro due to concerns over the Italian budget. Once the dust settles in Italian BTPs, it is likely the market will be more calm at the prospects for the euro and see little real rocket fuel left in this dollar rally (at least from a monetary policy perspective). As the 25% tariffs kick in for 2019 this should be growth negative and likely to drive up inflation. Not a scenario for the dollar bulls to thrive, something the market will position for.