In the final week before Christmas, the US dollar may have started with a minor corrective move, however the medium to longer term outlook seems to be well set now for ongoing dollar strength, with US Treasury yields a significant driving force. We look at the key factors to consider for forex markets, equities and commodities ahead of the New Year.
The dollar bulls are well and truly in the driving seat moving into 2017. The latest impetus into an already impressive move was given last week by the Federal Reserve. The FOMC surprised no-one with its 25 basis point rate hike, however the surprise came with the addition of increased expectations of further rate hikes in 2017. The market had become fairly settled on two rate hikes for next year, but the Fed Funds projections now point towards three. With only a tenth of a percentage point forecast to come off unemployment from the previous forecasts set in September and only 2.1% GDP growth, the committee is clearly looking towards hiking on the Trump effect. However, this could go two ways, and it depends upon Trump’s stance on protectionism and international trade as to how the Fed ultimately reacts on rate hikes next year. If Trump is successful in his domestic fiscal expansion and does not cause too many waves internationally, then the Fed could achieve three rate increases. The dollar is likely to continue to strengthen in this scenario. However, the difficultly arises if/when Trump starts to tear up/back away from trade deals such as NAFTA and the TPP. Could this then increase market fear and the doves on the FOMC could begin to become nervous again, using “international concerns” as an excuse to hold off on hikes (as they did in 2016). This would then see the dollar retrace. For now though the way is open for continued dollar strength.