US: Positive Powell pumps up the dollar - Westpac

New Fed chairman Jerome “Jay” Powell began his first semi-annual congressional testimony by praising his predecessor Janet Yellen’s performance and promised to “ensure a smooth leadership transition and provide for continuity in monetary policy,” but he was no Yellen clone in his Q&A, making clear his personal outlook and it is bullish, according to Sean Callow, Research Analyst at Westpac.

Key Quotes

“Powell declared that his “personal outlook for the economy has strengthened since December” when he was last required to submit his GDP forecast. So, he will be raising his growth forecast at the March meeting and expects others will too. Powell also said that he was increasingly confident that inflation would return to target and noted the strong global economy.”

“In terms of the driver of a more bullish US growth outlook, Powell indicated that the loosening of fiscal policy in recent months seemed likely to have a greater impact on growth than previously thought. Our colleagues in Westpac Economics have already made a similar revision, raising their 2018 US growth forecast from 2.5% to 3.0%.”

“Such optimism was reinforced this week by data such as an 18 year high on consumer confidence. But it was not all sunshine from the Fed chairman. He said the US was not on a sustainable fiscal path, which returns to a theme we have been discussing in recent weeks – when should the US dollar benefit from higher yields?”

“It may be that the dollar struggles when longer yields rise on investors pricing in wider budget deficits rather than a strong economy, but the dollar can rally if the Fed is projecting faster rate hikes due to the economy growing above potential.”

“In the week ahead, we expect the latter scenario to prevail, as markets ponder just what the bullish new Fed chief will deliver on 21 March – aside from the 100% priced in rate hike.”