Fed’s deeds must follow words - Commerzbank

Thu Lan Nguyen, analyst at Commerzbank, noted that the US dollar  will only appreciate sharply and lastingly when US central bankers finally follow their words with deeds and actually lift key interest rates

Key Quotes

“The likelihood of a Fed interest rate rise by the end of the year is still currently priced in at a little over 50%, although several FOMC members spoke out clearly in favour of a rate move over the past week. Even Fed chair Janet Yellen pointed out again that the majority in the FOMC expected a rate hike this year, but investors look unimpressed.” 

“The surprising thing is that interest expectations did not even rise much after the first TV duel of the two US presidential candidates and the US dollar therefore strengthened only moderately. Even though most observers saw Hillary Clinton as the winner of this debate, which financial markets should have viewed positively overall, as it is generally expected that the policies of previous governments would be continued under Clinton as US president. The outlook for the US economy under Donald Trump as president would be much more uncertain.” 

“Consequently, higher volatility on the financial markets would have to be expected under a president Trump and the Fed would then probably abstain from a rate hike for the time being. The fact that the slightly higher chance of an election victory for Clinton after the TV duel gave limited support to US interest expectations suggests that market participants see much bigger reasons against an interest rate rise soon.” 

“This supports our assumption that the US dollar will only appreciate sharply and lastingly when US central bankers finally follow their words with deeds and actually lift key interest rates.”