Dollar factors: Fed in focus - Westpac

Analysts at Westpac explained the US dollar factors in respect to its peers in the FX space and the Fed.

Key Quotes:

"As recently as 8 February, market pricing for the Fed to raise the funds rate by 25bp to 0.75-1.00% on 15 March was around 20%. After Fed chair Janet Yellen’s semi-annual testimony last week, pricing had jumped to around 40%. Yellen didn’t drop any bombshells but overall she retained her positive outlook on the US labour market, on inflation being on track to return to the 2% target and didn’t express the sort of concern about the global economy we heard this time last year, when China-driven jitters doused any thought of a quick follow-up to the Dec 2015 rate rise. 

That being the case, there isn’t an obvious reason why the Fed would wait until say June to move again. Perhaps some FOMC members will make the case for waiting until there is greater clarity on the fiscal policy of the new administration. But mostly, Fed officials have been arguing for 3 hikes this year even without assuming a fiscal boost. Beyond the debate over the short end, the 10 year Treasury yield rose to 2.52% last week, 3 week highs, reinforced by strong data on business sentiment, prices and retail spending. All this sounds very bullish for the US dollar. 

Yet price action has been very volatile. Long dollar positioning seems likely to produce significant unwinds at times. Still, it is hard to ignore the rebound in US yields and the Fed’s optimistic tone. We expect USD to find buyers on dips against most majors. 

This week in the US we have Fed minutes, prelim Feb Markit PMIs, new and existing home sales along with Kashkari, Harker and Lockhart. President Trump’s address to a joint session of Congress 28 Feb is shaping up as a key date too - he could finally outline some precise markers on tax cuts/reforms and infrastructure beyond campaign promises."