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US Dollar Rebound May Fizzle on Murky Fiscal Policy Outlook

US Dollar Rebound May Fizzle on Murky Fiscal Policy Outlook

2017-01-27 06:02:00
Ilya Spivak, Head Strategist, APAC
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Talking Points:

  • US Dollar gains as markets look ahead to 4Q US GDP data
  • Clouded fiscal outlook may tarnish upside growth surprise
  • Yen drops as stocks rise, Pound pulls back from 3-week high

The US Dollar outperformed in Asian trade, building on the largest gain in a week yesterday. The greenback’s bounce from the lowest levels in nearly two months may reflect protective pre-positioning ahead of the week’s first (and last) bit of top-tier US data, the fourth-quarter GDP report.

The annualized growth rate is expected to have slowed to 2.2 percent in the final three months of 2016 compared with 3.5 percent scored in the third quarter. While certainly not ideal, such a downturn looks hardly catastrophic, falling broadly in line with the medium-term term.

US economic news-flow has firmed relative to consensus forecasts in recent months, hinting that reality has proven more forgiving than analysts’ models suggested. This opens the door for an upside surprise, offering the benchmark currency a further lift.

Even in such a scenario however, the case for lasting upside follow-through is tenuous at best. The Fed has made it clear that on-coming fiscal policy is a key determinant in shaping the rate hike outlook. With clarity on that front still conspicuously absent, investors may be leery of committing to USD longs in earnest.

The Japanese Yen proved weakest among the G10 FX majors overnight. Asian equities markets traded higher, putting pressure on the anti-risk currency. The British Pound likewise traded lower in a move that looked corrective after prices hit a three-week high yesterday.

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Asia Session

US Dollar Rebound May Fizzle on Murky Fiscal Policy Outlook

European Session

US Dollar Rebound May Fizzle on Murky Fiscal Policy Outlook

** All times listed in GMT. See the full DailyFX economic calendar here.

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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