Fed: Phase II of policy normalization may see bigger dollar fall - AmpGFX

The Fed is moving into a new phase of its policy normalization where it begins its QE portfolio run-down and Greg Gibbs, Analyst at Amplifying Global FX Capital, expects that this phase is likely to result in even a bigger fall of USD as compared to the earlier phase. 

Key Quotes

“Even though the Fed says it hopes this will run on autopilot in the background, it is a form of policy tightening, and further rate hikes will be done more cautiously.  In fact, the timing of the next hike is much more uncertain, and it is possible there is a prolonged pause. The recent fall in inflation has extended for a fourth month and is not as temporary as the Fed described.  Yellen has emphasized it in watching inflation closely, and a significant cohort of FOMC members are expressing reluctance to hike further, especially now that the Fed is prepared to begin the QE portfolio run down this year.”

“The USD is approaching the base of a wide trading range over the last two to three years.  In this new phase of Fed normalization, the USD is more vulnerable to breaking key technical supports. A number of other countries’ central banks appear to have delayed policy tightening, hoping to lag behind Fed rate hikes and avoid currency appreciation.  This strategy contributes to a buildup in financial stability risks and no longer appears viable.”

“Any hints towards policy normalization in other countries, especially involving rate hikes, may spark significant exchange rate gains against the USD.  The market will be watching for any subtle hints in the ECB and BoJ meetings, and RBA minutes later today.  The US recovery this year may be stalling, and failure by Congress on key legislation threatens to send the USD into a tailspin.  The Healthcare bill remains a key test for Congress.”