Why Fed May Be In “Hawkish Hold” Mode On 15th March’17 And May Also Hike Only Once In Dec’2017 Rather Than Multiple Three Times In 2017 ?

USD Outlook Ahead of Fed Next Week: 11/03/2017 (09:00 GMT)

USD is quite strong against almost all the major G-20 currencies including JPY, especially after “Trumpism”, it gained by almost 14% till yesterday from 9^th Nov’16. Apart from divergent central bankers (hawkish Fed & dovish/neutral BOJ/ECB), the perception of “Trumponomics” (incremental fiscal/infra spending, lower taxes, higher inflation & higher growth) may be the biggest factor for such appreciation of USDJPY. What BOJ could not achieve in its decades old QQE to devalue its currency, Trump did that within a matter of few weeks by his mere rhetoric. Similarly, EURUSD fall by almost 9% due to Trump & also partly by growing EU political risks.

But, ultimately a stronger USD may not be good for overall US economy & its corporate earnings and thus Trump & his economic team may have realized that they have to pitch for a weaker USD or devaluation contrary to their earlier rhetoric during election time. Thus, Trump & his team are trying their best to talk down the USD at each & every available opportunity and the forthcoming G-20 meet may be one such occasion.

Under this scenario, whatever be the incoming US economic data or any other narratives, if Fed goes for multiple rate hikes in 2017-18, it will make USD more stronger, because at the other end BOJ or ECB may not respond proportionately; at best they will be neutral or slightly hawkish; for example, ECB may be now thinking to hike once from ZRIP before QE ends in Dec’17. So, Fed also can’t afford to be ultra hawkish in its real action, by hiking thrice or twice in 2017 as par their dot-plots.

Overall, most of the recent US economic data are quite upbeat including yesterday’s NFP data except the wage inflation factor and Fed should have hiked much more in earlier occasions, if it follows its own economic parameters/text books. But the problem is that, US rate or trajectory of USD may now be decided by Trump/US Govt rather than Fed, even if it implies question about Fed’s independence as an institution/central bank.

Thus, considering upbeat US economic data, uncertainty about trajectory of “Trumponomics”, dovish stance of Trump about USD, Fed may eventually hike only once in Dec’2017 against its unusual hawkish guidance of 2-3 hikes in March/Sep/Dec’17.

Subsequently, USD may also fall against all the major G-20 currencies and USDJPY may head towards 111-109 area & EURUSD may also rally towards 1.08-1.10 zone in the day ahead provided Kuoroda & Draghi will not introduce any new bazooka by pledge of more QQE. We may see more currency war among various G-20 countries including US in the coming months.

Analytical Charts: USDJPY