US: Predictable Powell unlikely to be the saviour for a weak USD - ING
New Fed Chair Jerome Powell will make his debut semi-annual testimony to Congress today and is expected to face stiff questions over the pace and extent of the Fed’s tightening cycle – not least in the context of recent financial market developments and the sharp stock market volatility seen earlier in the month, according to Viraj Patel, Research Analyst at ING.
Key Quotes
“When it comes to Fed policy, we’ve often noted that the true determinant for global asset prices is not necessarily the timing of rate hikes – but the overall extent or end-point of the hiking cycle. The neutral interest rate serves as the best gauge here – if one assumes that the Fed will look to perfectly navigate the US economy to full potential, without being forced to run excessively tight policy in the face of any undue late-cycle inflation. Given that we’re in the latter stages of the normalisation cycle, it is only natural that we see investors paying greater attention to the Fed’s neutral interest rate.”
“Yet, ‘The one interest rate differential that is driving the US dollar’ – we do not think any optimism over a higher US neutral interest rate will translate into US dollar strength – not least because much of the optimism of late is down to an upward revision in the global neutral interest rate. Exchange rates thrive on unpredictability and mispricings – and hence monetary policy as a driver for currencies packs more punch in economies where the gap between actual policy rates and neutral interest rates is the biggest (ie, the rest of the world).”
“Given that the long-run dynamics for the US economy have not altered – and in some regards deteriorated (ie, pointing to the increased US fiscal deficit) – we doubt that Fed Chair Powell will want to flip the policy script and prep markets for a more aggressive tightening path just yet. A boring and predictable Fed is thus unlikely to be the saviour for a structurally weak $. Today’s Jan US trade data will also be of interest in the context of the US twin deficits and the $.”