There seems to have been a tipping point that has been reached for the Federal Reserve now and this could be key for the dollar now. We look at the impact of how Fed monetary policy will now have. This is also a crucial week for the fate of Brexit. What are the implications for forex, commodities and equities.
There has been a decisive dovish shift from the Fed in 2019, and the move seems to have finally fired the starting gun on a weaker dollar. However we do not expect it to be a smooth ride. Views on Fed rate hikes in 2019 have wavered since the Fed hiked in December but talk of a 2019 cut seems to be premature. Furthermore, unwinding the Fed balance sheet (quantitative tightening) is expected to continue which will mitigate dollar weakness to an extent. Jerome Powell and several Fed speakers in the past week have advocated a more “patient” approach to monetary policy for the coming meetings. This will mean that a March hike is highly unlikely and probably rules out a hike in the first half. It will depend upon the degree of economic slowdown for growth (the Government slowdown is expected to cut around -0.1% off GDP for every one to two weeks it lasts for) and inflation. However the wildcard will be how the global economy and by extension the US economy responds to any agreement on trading relationship between the US and China. In the anticipation that some sort of deal will be struck in the coming months, the extent of a global cyclical downturn in 2019 could be less aggressive than markets are currently pricing. This could perhaps leave a single rate hike still in play for the Fed this year and even the thought of it may prevent the dollar falling quickly. The big dollar downer remains the reversal of the 2018 move with the US/China trade dispute with data dependence and the US economy capacity to surprise will not make it a smooth path.