The last two days of the week have seen US stocks cool down slightly after a relentless, record-breaking run in the previous five days that was due in part to ever-rising anticipation surrounding President Trump’s fiscal stimulus plans. Likewise, the US dollar had been rising in a sharp rebound until the latter half of the week, when continued uncertainty over the Federal Reserve’s path of rate hikes was pushed to the forefront. With a solid earnings season starting to wind down, US equities in the upcoming weeks will be driven even more by Trump’s actions, speeches, and tweets. The dollar will also be affected by developments emanating from the Trump Administration’s economic policies, but even more so by continued speculation over the Fed’s rate hike trajectory.

Much of the rally in US stocks during the past week has been fueled by Trump’s recent comment promising a “phenomenal” tax reform announcement within a few short weeks. This promise further emboldened already-bullish investors who anticipate accelerated company earnings improvements through potentially dramatic corporate tax cuts. On Thursday, Trump held a rather combative press conference attacking the media and intelligence agencies in the midst of questions about his administration’s dealings with Russia. In this press conference, Trump again briefly mentioned the impending unveiling of a new tax reform plan, but spent most of his time on unrelated political offensives. On February 28th, Trump is scheduled to address a joint session of Congress in lieu of a formal State of the Union address (as is common for newly-inaugurated presidents). It is expected that more details of his fiscal stimulus plans should be revealed at that time.

Also this past week, Fed Chair Janet Yellen testified before Congress, providing a statement and testimony that leaned towards the hawkish side. Yellen warned that delaying further rate hike increases would be “unwise,” but also qualified that by acknowledging continued risks and uncertainty in the US economy, notably including the many unknowns surrounding US fiscal policy going forward. Although the US dollar had rallied before and during Yellen’s testimony due to her slightly hawkish tone, the greenback fell sharply in the aftermath as dollar traders began once again to question the Fed’s characteristically ambiguous signals. The indecision continued into Friday as the dollar pared much of those losses. Wednesday of next week brings the minutes from February’s FOMC meeting. More details are likely to emerge from those minutes regarding the factors holding back the Fed.

It is of interest to note that the past association between tighter Fed monetary policy and pressure on equities no longer appears to be substantial. Record-surging stock markets have remained exceptionally complacent and well-supported despite fluctuating expectations surrounding the Fed’s interest rate trajectory. It appears that for the time being, any action or inaction by the Fed can be interpreted as a positive for the highly optimistic equity markets. If the Fed continues to hesitate, sustained accommodative monetary policy should boost stocks even further. And if the Fed raises rates, it would be a strong validation of economic health that should provide the right environment for corporate earnings growth. Therefore, a more relevant catalyst for equity markets going forward continues to be how quickly and how effectively President Trump will be able to push his ambitious tax reform plans through Congress, and what those plans will actually look like if and when he does so.

As for the dollar, its main mover continues to be the Fed’s monetary policy, especially when placed against the backdrop of other major central banks. For now, monetary policy divergence between the tightening Fed and its still-easy or neutral global counterparts remains in stark contrast. This divergence could begin to narrow, but for now, the Fed stands alone in its comparatively hawkish outlook. Over a medium-term horizon, these conditions should at least continue to keep the dollar supported, if not prompt a new leg in the dollar’s bullish trend.

Investopedia does not provide individual or customized legal, tax, or investment services. Since each individual’s situation is unique, a qualified professional should be consulted before making financial decisions. Investopedia makes no guarantees as to the accuracy, thoroughness or quality of the information, which is provided on an “AS-IS” and “AS AVAILABLE” basis at User’s sole risk. The information and investment strategies provided by Investopedia are neither comprehensive nor appropriate for every individual. Some of the information is relevant only in Canada or the U.S., and may not be relevant to or compliant with the laws, regulations or other legal requirements of other countries. It is your responsibility to determine whether, how and to what extent your intended use of the information and services will be technically and legally possible in the areas of the world where you intend to use them. You are advised to verify any information before using it for any personal, financial or business purpose. In addition, the opinions and views expressed in any article on Investopedia are solely those of the author(s) of the article and do not reflect the opinions of Investopedia or its management. The website content and services may be modified at any time by us, without advance notice or reason, and Investopedia shall have no obligation to notify you of any corrections or changes to any website content. All content provided by Investopedia, including articles, charts, data, artwork, logos, graphics, photographs, animation, videos, website design and architecture, audio clips and environments (collectively the "Content"), is the property of Investopedia and is protected by national and international copyright laws. Apart from the licensed rights, website users may not reproduce, publish, translate, merge, sell, distribute, modify or create a derivative work of, the Content, or incorporate the Content in any database or other website, in whole or in part. Copyright © 2010 Investopedia US, a division of ValueClick, Inc. All Rights Reserved

Recommended Content


Recommended Content

Editors’ Picks

AUD/USD recovers above 0.6750 after Australian jobs data

AUD/USD recovers above 0.6750 after Australian jobs data

AUD/USD picks up a late bid and recovers above 0.6750 in Asian trading on Thursday, following the release of mixed Australian employment data. The extended post-Fed US Dollar recovery, amid a cautious market mood, could limit the pair's upside ahead of US data. 

AUD/USD News
USD.JPY jumps toward 144.00 on the road to recovery

USD.JPY jumps toward 144.00 on the road to recovery

USD/JPY gains traction and approaches 144.00 in Thursday's Asian session. The uptick of the pair is bolstered by the impressive US Dollar recovery. Investors shift their attention to the US data and the Bank of Japan interest rate decision on Friday. 

USD/JPY News
Gold price remains on the defensive amid the post-FOMC USD recovery from YTD low

Gold price remains on the defensive amid the post-FOMC USD recovery from YTD low

Gold price struggles to lure buyers despite the Fed’s jumbo interest rate cut on Wednesday. A further recovery in the US bond yields underpins the USD and caps the non-yielding metal. Concerns about an economic slowdown, along with geopolitical risks, help limit the downside.

Gold News
Ethereum attempts recovery following first rate cut in four years

Ethereum attempts recovery following first rate cut in four years

Ethereum is trading above $2,330 on Wednesday as the market is recovering following the Federal Reserve's decision to cut interest rates by 50 basis points. Meanwhile, Ethereum exchange-traded funds recorded $15.1 million in outflows.

Read more
Australian Unemployment Rate expected to hold steady at 4.2% in August

Australian Unemployment Rate expected to hold steady at 4.2% in August

The Australian Bureau of Statistics will release the monthly employment report at 1:30 GMT on Thursday. The country is expected to have added 25K new positions in August, while the Unemployment Rate is foreseen to remain steady at 4.2%.

Read more
Moneta Markets review 2024: All you need to know

Moneta Markets review 2024: All you need to know

VERIFIED In this review, the FXStreet team provides an independent and thorough analysis based on direct testing and real experiences with Moneta Markets – an excellent broker for novice to intermediate forex traders who want to broaden their knowledge base.

Read More

Majors

Cryptocurrencies

Signatures