At 19:00 pm GMT, on Wednesday December 13th, the FOMC will reveal its latest decision on the key interest rate for the USA. Currently at 1.25% the general consensus opinion, gathered from the economists polled by news agencies Reuters and Bloomberg, is that the key rate (upper bound) will rise to 1.5%. A third rise this year would complete the FOMC/Fed’s commitment to raise rates by three times in 2017, beginning a process of normalisation, which could see the basic rate rise to 3% in 2018.
So far the USA economy and moreover the equity markets, have coped extremely well with the 2017 interest rate rises, defying the belief voiced by some analysts that any significant rise could harm the USA economic recovery. Trump’s pledge; to make drastic tax cuts, that would predominantly and disproportionately benefit wealthy corporations, has more than countered any interest rate effects, with certain equity markets, such as the SPX, delivering an approx 20% annual return.
The U.S. dollar hasn’t enjoyed such growth versus its main peers during 2017, despite the interest rate rises the dollar has fallen versus sterling and the euro in 2017 and been close to flat versus yen. GPB/USD slumped to 1.19 in January, but recovered to a 2017 peak of circa 1.36, currently trading at approx. 1.33. Whilst the recovery in the U.K. pound has been attributed to the brexit shock evaporating, many analysts believed the Fed rate rises would have caused a higher dollar valuation. Similarly EUR/USD fell to circa 1.04 at the start of 2017, to peak at circa 1.21 in August, whilst the ECB kept their main rate at zero and continued with their APS (asset purchase scheme).
Trump’s commitment to engage in a huge fiscal stimulus, including an infrastructure regeneration scheme not witnessed in decades, was the primary reason put forward by many analysts, for the U.S. dollar’s lack of strength. A project that appears to have fallen off the Republicans’ radar as 2017 ends.
Opinion varies as to the impact any rate rise would have on the U.S. dollar, if a rise is announced on Wednesday evening. Certain analysts are of the opinion that the effect is already accounted for in the FX markets, given that through forward guidance the Fed/FOMC have already telegraphed the decision, therefore any dollar movements will be relatively contained. Other analysts are of the opinion that the dollar may rise, if a rate rise decision is accompanied by a hawkish press release, which suggests further tightening of the monetary policy in 2018, through further interest rate rises and quantitative tightening.
However, if a dovish narrative is delivered, with the FOMC suggesting a softly, softly approach in 2018; raising rates and unwinding/divesting of their $4.5 trillion balance sheet in an extremely cautious manner, then the dollar reaction may be muted. It must also be noted that the full minutes of the meeting will not be released until January.
As always, traders would be advised to monitor their dollar positions and exposure before, during and immediately after the FOMC decision is made public. All the usual effective management techniques should apply, risk and stop adjustment in particular.
KEY RELEVANT ECONOMIC INDICATORS FOR THE USA.
• GDP growth 3.3%.
• Inflation rate 2%.
• Interest rate 1.25%.
• Unemployment rate 4.1%.
• Wage growth 3.2%.
• Government debt v GDP 106%.
• Composite PMI 54.5.
• Retail sales 4.6%.
