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US Interest Rate Hike

Minutes from the FOMC’s November meeting showed a strengthening case to raise interest rates, with some members saying a hike should happen at the year’s final meeting, on December 13th-14th.

The summary of the meeting, only a week before the US election, provides the clearest signal yet that the Fed plans to lift rates for the first time this year.

Uncertainties around President-elect Donald Trump’s economic policies have not softened market expectations. According to Bloomberg, federal funds futures contracts are now pricing in a ‘100% probability’ of a move next month.

Since Trump bested Hilary Clinton in last month’s election, the Dollar has been rallying across the board, with markets reacting positively to his fiscal policy initiatives. However, with many moving parts to Trumps policy agenda, the market is at risk of missing drivers in its myopic focus on fiscal policy alone.

According to FX strategist Daragh Maher, the key areas for the Dollar are:

  • Fiscal Policy – the hike in interest rates will outweigh any negatives resulting from higher inflation and a wider current account deficit
  • Repatriation policy – these flows back to the US should support the Dollar. To what extent, is too difficult to estimate. Many emerging market investments and their current profits will likely already be Dollar denominated

Both fiscal and repatriation policies are positive for the Dollar.

  • Immigration policy – deporting immigrants will reduce the labour supply which could lead to an adverse implication for growth
  • Trade policy – Trump has maintained a strong anti-trade position throughout his campaign. A recent announcement that he will pull out of the Trans-Pacific Partnership on his first day of office is sparking fears of a potential trade war.

Trump’s policy regarding immigration is widely seen as a negative for the Dollars prospects, with trade policy remaining ambiguous.

inflation-bloomberg

Domestic consumption remains resilient, with retail sales from September and October showing the biggest back to back gains since 2014. Annual inflation starting five years from now jumped to 2.1% from 1.9% on election day.

Recent profit warnings by a number of US companies with heavy international exposure, have also attributed this to the Dollars current strength.