Forex Forecast for 2017

Forex

Forex Forecast for 2017 -Heading into 2017, US dollar bulls have much to be joyous about The Federal Reserve plans to embark on a gradual mission to tighten policy further from current levels. Inflation is at the highest point in years and the slack in the labor force has gradually been reduced. Moreover, the proposed fiscal stimulus in form of spending and tax cuts are still on the table despite some doubts. All told, the US remains the least dirty shirt of the major advanced economies heading into the new year.

However, even though there is much cause for optimism, many analysts remain skeptical of the US dollar’s potential. The global backdrop, for one, is more precarious than ever, especially with the looming geopolitical risks across Europe and North America, growing pains of demonetization in India, and decelerating Chinese economic activity. Despite the numerous challenges that lie ahead, the US and consequently the dollar are uniquely poised to outperform during the upcoming calendar year.

Volatility

Granted, much of the pessimism was warranted given weak inflation, a volatile presidential race, and tapering growth during the first half of the year. However, given the outlook and recent policy adjustments, 2017 is shaping up to be significantly different than 2016 for the US dollar. Further divergences in monetary policy will be the predominant drivers of the upside momentum while fiscal policy also plays a role, especially if policymakers can exercise more budgetary discipline in certain areas.

The Feds Remain In Control

On the US Dollar’s side, the decision in December 2016 to signal three rates in 2017 — as opposed to the market priced two ahead of the policy statement — has sent US Treasury yields higher As a gauge of long-term growth and inflation expectations, the US Treasury  yield curve steepening is a reflection of the market’s belief that tighter monetary policy is coming in the near-term.

What to expect from the FED in 2017

The Fed not only raised rates but also made an unprecedented upgrade of its interest rate path for 2017, to three hikes.  This is the main reason for the dollar’s surge. The forecast for three hikes as a message that the Fed is indeed confident in the steady growth path of the US economy.
However, a total of three hikes is probably the maximum number of hikes that the Fed foresees for the upcoming year. It is important to note that when Yellen and her colleagues made the historic, first post-crisis hike in December 2015, they projected four hikes for 2016. This year ended with a lone move by the FOMC.  At this point, a total of only two rate hikes for 2017 makes more sense. The first could come in June, after the dust settles from Trump’s  initial, critical months in office. The second one could come only in December.

Three Factors for a rate hike

The path of rate hikes depends on three major factors. First, the economic data: the Fed reiterates it is data dependent and this is true. The second factor is the actual policy of Donald Trump. Markets have gotten ahead of themselves with high hopes for a blitz of fiscal stimulus  coming from the incoming administration. Only part of Trump’s grand plans will come to fruition. Politicians’ promises should be taken with a grain of salt, something the markets haven’t applied so far. The third factor is the strength of the US dollar. The higher exchange rate of the greenback serves as means of tightening on its own, dampening inflation ane weighing on exports. In addition, the move has repercussions for emerging market economies. When the dollar abruptly surges, we hear Fed officials publicly discussing it as a factor. in their deliberations.
Yellen mentioned the dollar in an answer to a question during the press conference. Another significant rally could smooth the path of hikes.
While three rate hikes cannot be ruled out, we would need to see the ongoing solid growth in the economy, significant stimulus from Trump and no more big USD rallies.