Consensus Bullish Dollar View Retained as Federal Reserve Expected to Take Action in March

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The March meeting of the US Central Bank called to set the level of interest rates in the country is ‘hot’ according to Bank of Tokyo Mitsubishi, who now see a rate rise as likely, and forecast more gains for the Dollar in the first half of the year.

“Our USD bullish view in the first half of the year remains in place and indeed has been reinforced by the increased probability that the FOMC will raise rates at its next meeting on 15th March,” said the bank in a recent note seen by PSL.

The Bank have increased their house view that the Fed will raise rates by two times in 2017 to three times, indicating the possibility of a 0.75% total rise to an overall interest rate level of 1.50%, the same as Australia.

Higher interest rates tend to support currencies as they attract more capital form foreign investors seeking higher interest returns on their capital.

Their view is echoed by Abn Amro who have also updated their house view, saying that they too think the Federal Reserve will increase interest rates in March.

“We now expect the Fed to hike rates this month,” said Abn Amro in a note seen by PSL.

Their reasoning is based on better-than-expected business surveys which show growing confidence amongst the business community and are often cited as reliable forward indicators for the economy.

“The sharp year-to-date improvement in US business surveys signals the possibility of accelerating US growth in early 2017. Business surveys released so far in 2017 have been quite strong, with the January ISM manufacturing and non-manufacturing indices at or near one-year highs and consumer confidence surveys also trending up. Other data releases, including consumer spending, have also been stronger than expected,” remarked the Dutch lender.

Yellen Likely to ‘Pave the Way’

A key event on the radar for these expectations is the speech by the Federal Reserve Chairwomen Janet Yellen on March 3, however, Bank of Tokyo Mistubishi (BOTM) see little chance of her undoing the momentum of current expectations.

“With the probability of a March rate hike now around 75%, we doubt Fed Chair Yellen will feel justified in reversing the building market expectations at such a late stage when she speaks on 3rd March,” they said.

Nevertheless, the bank forecasts weakness in the second half of the year (H2) as the strengthening Dollar and higher borrowing costs dampen economic performance and weigh on export competitiveness.

“We are also maintaining our view of dollar weakness in H2. If the Fed does raise rates as expected, the rise in US yields and the strength of the dollar will likely result in a more mixed US economic performance that will dampen expectations over the sustainability of the Fed tightening cycle in 2018 and beyond,” said BOTM.

Trump Speech Supportive

Analysts were disappointed in the lack of detail in Donald Trump’s State of the Union Address, however, he did mention infrastructure spending, and increased the promised amount from 500bn to 1tr.

He also mentioned substantial tax cuts for middle-class America and Corporations. 

His continued emphasis on stimulator programmes is likely to support a more optimistic outlook for the economy and encourage more normalisation and rate increases from the Federal Reserve if anything, further supporting the view that rates will rise multiple times in 2017.

The impact of rising interest rates is likely to support the Dollar via increased flows of foreign capital.