US Dollar May Struggle as Trump Speech Overshadows Hawkish Fed

Fundamental Forecast for the US Dollar: Neutral

  • All eyes on Trump speech as fiscal policy remains clouded
  • US Dollar may struggle as the “Trump trade” loses steam
  • Remarks from Yellen, Brainard headline Fed-speak docket

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The US Dollar managed another tepid advance last week. Firming Fed rate hike bets offered a bit of early optimism but the chipper mood fizzled and gains began to evaporate on Wednesday despite a steady stream of hawkish comments from central bank officials.

Markets were underwhelmed by minutes from February’s FOMC meeting, which painted the rate-setting committee as considerably more cautious than the latest pronouncements suggested. However, it was a bit of detail about on-coming fiscal policy that really punished the greenback.

Newly minted Treasury Secretary Steven Mnuchin said the impact of the administration’s economic program probably won’t be seen this year. That struck at the heart of the so-called “Trump trade”, a theory that an expansionary fiscal stance will boost inflation and force the Fed into a steeper tightening cycle.

The week ahead will keep the same themes firmly in the spotlight. A busy docket of scheduled commentary from Fed policymakers is headlined by remarks from Chair Yellen and Governor Lael Brainard, a vocal dove. If she too is keen to get on with stimulus withdrawal, a hike in March will seem more likely.

On the economic data front, a broad offering of activity indicators is expected to show steady progress in line with recent trends. A revised set of fourth-quarter GDP figures is projected to deliver an upgrade, nudging the on-year growth rate to 2.1 percent from the originally reported 1.8 percent.

At face value, this seems like a generally supportive environment for the US currency. However, it may all prove for naught if fiscal considerations spoil the mood again. Whether or not that happens will depend on President Trump, who is due to address a joint session of Congress on Wednesday.

Last week offered compelling evidence arguing for the primacy of fiscal developments over monetary ones in moving markets.Indeed, traders have seemingly concluded that the FOMC is as much at the mercy of the Trump White House as anyone.

That may translate into a difficult week for the global reserve currency. A speech replete with promises of greatness but still short on substantive policy specifics will probably leave investors disappointed. That may hurt the “Trump trade” narrative further, undercutting rate hike bets regardless of what Fed officials utter.