Baku, Azerbaijan, Jan. 31
By Azad Hasanli – Trend:
Today's meeting of the Federal Open Market Committee of the US Federal Reserve System will not bring anything new to the current situation with the US dollar, Head of FX Strategy/Saxo Bank John Hardy said.
“Federal Reserve rate hike expectations have been marching persistently higher since last September, easily outpacing rate expectations for the other central banks yet leaving the US dollar very weak as this is clearly not the market driver,” Hardy told Trend Jan. 31. “Rather than Fed rate expectations, the most significant driver here may be the overriding concern that the US fiscal outlook and widening US current account deficit are an ugly negative for the currency; a significant source of the weak USD flow is from central bank reserve managers keen to diversify out of US dollars.”
“On that note, therefore, it would seem difficult for outgoing Fed chair Janet Yellen’s last hurrah tonight to provide any new twist in the plot,” he said. “It doesn’t seem her style to do anything more than provide a gentle warning, and only a massive steepening in expectations could upset the apple cart.”
He added that US President Donald Trump’s State of the Union speech provided little for the market to chew on.
“Nothing Trump brought up in the speech provided new information and there was not the particularly harsh turn on the trade policy front that many had feared,” he said.
“There was also an effort to “reach across the aisle” to Democrats, but Trump’s normally divisive language was also more than apparent and Democrats smell a strong victory riding anti-Trump sentiment into the mid-term elections this November.”
“This chart shows how the market is pricing the likelihood of the Fed funds rate as of this December’s FOMC meeting reaching 1.75-2.00 percent (green = two hikes from current), 2.00-2.25 percent (blue) or 2.25-2.50 percent (red),” Hardy said. “It is almost impossible to believe or remember that as recently as September of last year, the market was pricing in almost zero likelihood that the Fed would even hike twice beyond last December’s rate hike. Now we see the three-hike scenario overtaking the two-hike scenario and a significant surge in favor of four hikes, and yet the USD remains weak – so why should it matter if the anticipation is upgraded another few basis points after this evening’s FOMC meeting?”