Can Fed Lift the Dollar?

Market Drivers March 21, 2018
Loonie gets a boost from NAFTA talks
UK Labor data beats
Nikkei closed Dax -0.13%
Oil $64/bbl
Gold $1316/oz.
Bitcoin $9000

Europe and Asia:
GBP UK Claimant Count 9.2K vs -5K
GBP UK Average Earnings 2.6% vs. 2.5%

North America:
USD Existing Home Sales 8:30
USD FOMC 14:00

The dollar was weaker across the board ahead of the key FOMC meeting later today in subdued Asian and early European trade, marked by low liquidity because Japan was on holiday.

The Fed is widely expected to hike rates by 25 bp to 1.75%, but the markets will focus on future projections as well as the tone of Mr. Powell’s remarks who will be facing the press for the first time in his capacity as Fed Chair.

Ahead of the meeting, Fed officials have been uniformly hawkish, insisting that the central bank is committed to normalizing monetary policy. They haven’t wavered despite market concerns about a possible trade war, lackluster inflation readings and disappointing demand from the consumer. Therefore, it will be crucial if Mr. Powell shrugs off those worries as temporary bumps in the road and insists that the prospect of 3 to 4 hikes this year is a distinct possibility.

The markets remain dubious about Fed’s follow through which is one of the primary reasons that the dollar has failed to rally despite widening interest rate differentials. If Mr. Powell hem and haws in today’s presser offering many qualifiers to any further Fed action the buck could fall further with USDJPY testing support at 105.50 while EURUSD could make another move to 1.2400 and cable could test the near term swing highs near 1.4200. However, it’s doubtful that Mr. Powell will give an inch at today’s presser. He has cast himself as a more hawkish policymaker than Ms. Yellen and is unlikely to deviate from this stance today.

The key question is whether the markets will believe him and the post presser price action will be key. Ultimately the dollar rally can only become sustainable if US data shows re-acceleration which is why any bump higher in the buck may be short-lived if the US economy can’t back up the Fed.