US Dollar Aims to Extend Rally on FOMC Minutes, Powell Speech

2018-05-19 03:05:00 Ilya Spivak

FUNDAMENTAL FORECAST FOR THE US DOLLAR: BULLISH

Fed freshmen testimony drives US Dollar to five-month high
May FOMC meeting minutes may boost rate hike bets further
Chair Powell may help USD advance with Riksbank speech

See our quarterly US Dollar forecast to learn what will drive prices through mid-year!

The US Dollar returned to the offensive as comments from incoming Fed policymakers Richard Clarida and Michelle Bowman at their Senate confirmation hearings bolstered a hawkish shift in policy bets, as expected. It rose to a five-month high against its top counterparts as the futures-implied 2019 rate hike path steepened and the spread between 10- and 2-year Treasury bond yields widened by the most since January.

The week head brings ample fodder for continued speculation. Minutes from the May 2 meeting of the rate-setting FOMC committee take top billing. The policy statement released following the sit-down reinforced the status quo three-hike projection for 2018, but an upgrade in rhetoric on inflation signaled scope for a more aggressive tightening cycle in the years to follow.

Traders will parse officials’ comments for clues about what this actually means in practice. As it stands, market pricing implies a lean toward two rate hikes in 2019. The Fed’s own forecast – last updated in March – calls for three. A hawkish tone that pushes markets’ view closer to the central bank’s position is likely to offer the greenback another upward nudge.

The spotlight then turns to speech from Fed Chair Jerome Powell, who is due to discuss financial stability and central bank transparency at conference celebrating the 350th anniversary of the Risksbank in Stockholm. He is likely to signal that spillover risks are unlikely to deter the Fed from pursuing tightening, echoing remarks made at an SNB/IMF event earlier this month. That too stands to benefit the US currency.