US Dollar May Turn Defensive Anew on Cautious Fed Comments

Fundamental Forecast for the US Dollar: Neutral

  • Battered US Dollar finds a lifeline as wage growth hits cycle high
  • Cautious Fed commentary may revive “Trump trade” unwinding
  • Supportive data flow may arrive too late to arrest USD weakness

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The US Dollar spent most of last week on the defensive as financial markets returning from the winter holidays went about retracing from “Trump trade” extremes. The currency shrugged off supportive manufacturing- and service-sector ISM surveys but paid keen attention to minutes from December’s FOMC meeting. These showed that Fed officials were far less convinced of the need for a drastic hawkish policy pivot than the markets seemed to be.

December’s official US labor-market statistics lifted the greenback’s spirits. While the monthly payrolls gain fell short of analysts’ forecasts, wage inflation unexpectedly soared to a cyclical high of 2.9 percent. This hinted that the economy is running hotter than has been accounted for even before any expansionary fiscal policy championed by President-elect Trump compounds upward price pressure. This sent the US unit higher alongside bond yields and year-end Fed Funds rate projections implied by futures markets.

The week ahead may not be as kind as Fed rhetoric retakes the spotlight. A busy docket of scheduled commentary from central bank officials features speeches from Chair Yellen as well as incoming FOMC voters Patrick Harker and Charles Evans, presidents of the Philadelphia and Chicago branches respectively. James Bullard and Eric Rosengren of the St. Louis and Boston Fed outposts, both members of last year’s policy setting-committee, will also have the opportunity to opine.

If policymakers’ posture has remained broadly unchanged since December, they ought to strike a cautious tone. Indeed, Trump administration has yet to take up office and the practical implications of their still-vague policy plans are unknown. That means upcoming commentary is unlikely to endorse the one-sided view that rate hike surprise risk is firmly on the upside, a narrative that the markets seemed to wholeheartedly embrace in the final weeks of 2016. Needless to say, this bodes ill for the US Dollar.

Top-tier economic data will not enter the picture until late in the week. Retail sales, consumer confidence and PPI figures are all due to cross the wires on Friday, with consensus projections pointing to improvements all around. Such outcomes may offer a lifeline to the greenback much like the jobs report. However, there seems to be ample space for the resumption of profit-taking on long-USD positions before whatever support is to be found on the statistical front emerges.