Bullish Fed Expectations US Dollar Impact

Dollar’s resurgence is the key theme at the end of the week on the back of Larry Kudlow’s appointment as Chief Economic Advisor to President Trump and ahead of the FOMC meeting on Thursday. In this 16 March Bullish Fed Expectations US Dollar Impact, notice the factors that would spur the Dollar to fresh highs.

16 March, ADS Securities – Kudlow is a firm supporter of a strong Dollar policy and the US currency and equity markets responded positively to his appointment but it will be interesting to see how his views will combine with Trump’s long-time “weak Dollar” preference.

16 March Bullish Fed Expectations US Dollar Impact

The Dollar rallied as investors were re-positioning a few days before the Fed meeting but equities paired their gains by the end of the session to close marginally above water as traders prefer to stay on the defensive before as the FOMC event that could threaten stocks’ long-term rally.

The greenback is erasing all its weekly losses and even though overnight the Dollar Index pulled back slightly it seems that the US currency is heading for a positive ending for the week.

Fed Interest Rate Decision next Thursday

Market participants are shifting their focus to the Fed interest rate decision next Thursday and with the US central bank almost guaranteed to raise rates the spotlight will fall on their forward guidance and their famous dot plot – the chart illustrating their expectations for future interest rate levels.

There’s a lot of speculation around the forward guidance that the Fed will choose to communicate to the markets given that their message has the potential to turn the tables. A bullish tone discussing the progress in the economy and the need for more policy tightening will hint at the Fed looking to raise rates more than the 3 times consensus expectation.

This would spur the Dollar to fresh highs but will spell disaster for the equity markets; our view, however, is that the recent downtick in inflation, wage growth and retail sales will not allow the Fed to change their tune just yet.

Fed’s dot plot will be the key focus of Thursday’s meeting as it conveys their forward guidance. Source: Bloomberg.

Eurozone CPI Release – Euro Outlook

Shifting our focus to today’s price action, the morning session holds the Eurozone CPI release for February but although expectations are set for a positive inflation reading it’s unlikely that it will change the broader bearish tone in the Euro.

The shared currency is trading just above the 1.23 mark this morning and a positive CPI reading will help it remain above this key level but our bearish outlook remains in place. Any rallies higher will be treated as selling opportunities for traders that will look to benefit from Dollar’s momentum ahead of the Fed policy meeting next week.

Stocks Pair Gains

Equities in Asia are bearish this morning and the European and US futures are trending towards a slightly negative opening bell for the last trading session of the week.

Lary Kudlow’s appointment provided some support to stocks but it seems that equity traders are more concerned about Fed’s tone of language on Thursday that could extend the losses seen this week. We expect more defensive positioning throughout the day that should conclude a bearish week for global stocks.

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