The US dollar jumped higher across the board as the Fed remains set to raise rates in December. Yet as the hours pass by, at least EUR/USD is already halfway back from low support, trading around 1.1940, up from the lows of 1.1860.
Why does the dollar fail to extend its gains? Here are four reasons to cast doubt about the expectations for hikes and consequently about the next moves for the US dollar:
- Hurricanes: Sure, in the long term, the damage that is caused by the hurricanes is repaired and that creates economic activity. But what about the shorter term? If the Fed is data dependent and Q3 growth falls sharply, will it really raise rates in December?
- Less confidence about inflation: In the press conference that followed the June meeting, Yellen was more confident about “transitory factors” pushing inflation lower: prescription drugs and wireless charges were singled out. This time, she also mentioned some one-off factors (the hurricanes from item no. 1 are an example) but she was far less confident. Low inflation in 2017 is a “mystery” according to the Fed Chair. They will be monitoring the situation to see if it is persistent.
- Government shutdown threats: The bipartisan deal between Trump and the Democrats was only a temporary one. It expires in December and tensions could mount towards this date. Politicians eventually reach deals on these issues, but things could become complicated. If stock markets begin reacting to such political worries, the Fed would prefer to postpone the hike. The Fed has shown a lot of patience in the past.
- Fed composition: In the press conference, Yellen said that she has not met President Trump since early in his term. She also mentioned “future policymakers”. These are hints that she may be on her way out. Vice Chair Fischer is retiring in October and the Board of Governors already has quite a few vacancies. Trump has a unique opportunity to shape the central bank. He promised strong growth and may favor dovish members to keep interest rates at low levels and to support growth. Yellen may be as hawkish as it gets. With a potentially more dovish Fed, the prospects of another rate hike in December and no less than 3 hikes in 2018 look diminished.
What do you think? Will the Fed still raise interest rates in December? Can the dollar continue rising or is it set to hit a wall?
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