Lee Hardman, Currency Analyst at BTMU, assessed the recent events in the US economy and gives his views on the Dollar.
“The current favourable environment for carry trades would be challenged if the Fed surprised the market by delivering a faster pace of rate hikes. The market’s reaction to the release yesterday of the latest firm US retail sales and CPI reports suggests to us that the market has become too complacent over the likelihood of faster Fed rate hikes”.
“The report increases the likelihood that the Fed could raise rates at the March or May FOMC meetings and deliver the planned three rate hikes during this year. Fed Chair Yellen’s comments during her semi-annual testimony that “waiting too long to remove accommodation would be unwise” appear well timed. It could increase concern that the Fed is already behind the curve in tightening policy”.
“We are puzzled by the US dollar’s reaction which casts some doubt on our view that a faster pace of Fed tightening will encourage a stronger US dollar in the coming months, although at this stage we put the lack of support for the US dollar as mainly reflecting the market’s complacency”.