US Dollar May Rebound as the Fed Reasserts Rate Hike Intentions
Fundamental Forecast for the US Dollar: Neutral
- US Dollar snaps four-week win streak on political instability woes
- Hawkish FOMC minutes, Fed-speak may counter selling pressure
- Upbeat Q1 GDP revision, PMI data may aid greenback recovery
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The US Dollar snapped a four-week winning streak as political instability fears weighed against bond yields and flattened the 2017 rate hike outlook priced in Fed Funds futures. This followed reports that ousted FBI Director James Comey wrote a memo detailing a request from President Trump to drop a probe into former national security advisor Michel Flynn’s ties to Russia.
That bombshell came after earlier reports that Mr Trump shared classified intelligence with senior Russian officials visiting the White House. Investors worried that deepeningpolitical turmoil may derail plans for expansionary fiscal policy that had been expected to boost corporate earnings and push the Fed into a steeper rate hike cycle, a thesis known as the “Trump trade”.
Markets will probably remain vulnerable kneejerk volatility spikes as troubling headlines continue to pour out of Washington DC. Former FBI Director Robert Mueller has been appointed as special counsel to continue investigating ties between the Trump camp and Russia while Mr Comey has agreed to testify in Congress. That all but assures a steady stream of news-flow to absorb into asset prices in the day ahead.
With that said, political turmoil is a potent driver of US Dollar price action only to the extent that it portends broader market instability that derails the Fed rate hike cycle. To that end, a busy docket of scheduled commentary from central bank officials as well as the release of minutes form this month’s FOMC meeting may provide a critical counterweight to negativity emanating from the White House.
Central bank officials were planning to ramp up tightening before last year’s presidential election and confidently signaled an intent to press on in June absent clarity on the administration’s fiscal program. A steady stream of soundbites and an upbeat Minutes document affirming as much may undercut politically motivated selling pressure, offering a lifeline to the embattled greenback.
That message would sound all the more credible if it were accompanied by improving economic data outcomes. A second look at first-quarter GDP figures is front and center on this score, with an upgrade to the annualized growth rate expected. The preliminary set of May’s manufacturing- and service-sector PMI surveys is also slated to show improvement in the pace of activity growth.
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