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FOMC Preview & Post Election Outlook for the Dollar

  • Kathy Lien
  • 8 November 2018

Daily FX Market Roundup 11.07.18

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management

 

With the US Midterm Elections behind us and the Democrats victory in the House the U.S. dollar ended the day lower against most of the major currencies.The only currency that performed worse than the greenback was the Japanese Yen, which slid on the back of the risk rally. But it would be mistaken to automatically assume that investors interpreted the elections results as dollar negative because all of the selling happened during the European trading session. The U.S. dollar traded higher throughout NY trade as Treasury yields turned positive and equities soared.

 

Many thought that a split Congress and the corresponding political gridlock would crush the greenback but the Democrats' control of House led to an immediate shift in tone by the President.He said "Hopefully we can all work together next year to continue delivering for the American people, including on economic growth, infrastructure, trade, lowering the cost of prescription drugs. The Democrats will come to us with a plan for infrastructure, a plan for healthcare, a plan for whatever they're looking at and we'll negotiate." The President is willing to deal and the markets like it.

 

Everyone is hoping that we'll see a more collaborative attitude by the President and the Democrats as they recognize each other's powers to promote or stifle policy progress.Life will go on, the Fed will continue to raise interest rates and the Democrats won't put up too much resistance to the President's middle class tax cuts. Of course, there will be an emphasis on stalling many of the Administration's efforts at first from repealing the health care law, to changing campaign finance and ethics rules but shortly thereafter they will be looking to find common ground in easy areas such as infrastructure. In the near term, the market's positive reaction to the election reinforces expectations for December tightening and explains the dollar's resilience.

 

Looking ahead, we have a Federal Reserve monetary policy announcement on Thursday. While the Federal Reserve is widely expected to leave interest rates unchanged and reiterate their plans to raise interest rates in December, the tone of the FOMC statement will either remain unchanged or be a tad more cautious. We know from the Beige Book that the central bank is worried about trade uncertainties and since the last policy meeting in September there's been more setbacks than improvements in the US economy. As shown in the table below, there's been weakness in consumer spending, inflation the housing market and manufacturing activity. Although the labor market remains strong and many districts report labor shortages, many companies had a cautious guidance this quarter so hiring demand could ease. With that in mind, the dollar's reaction to this month's Fed meeting could be limited because it comes right after a rate hike with no press conference. The days of the dollar's rally are numbered but an unchanged statement could give the greenback a modest push.

 

 

 

 

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About the Author
Kathy Lien
Kathy Lien is Managing Director and Founding Partner of BKForex. Having graduated New York University’s Stern School of Business at the age of 18, Ms. Kathy Lien has more than 13 years of experience in the financial markets with a specific focus on currencies

Ms. Kathy Lien is Managing Director of FX Strategy for BK Asset Management and Co-Founder of BKForex.com. Her career started at JPMorgan Chase where she worked on the interbank FX trading desk making markets in foreign exchange and later in the cross markets proprietary trading group where she traded FX spot, options, interest rate derivatives, bonds, equities, and futures.

In 2003, Kathy joined FXCM and started DailyFX.com, a leading online foreign exchange research portal. As Chief Strategist, she managed a team of analysts dedicated to providing research and commentary on the foreign exchange market.

In 2008, Kathy joined Global Futures & Forex Ltd as Director of Currency Research where she provided research and analysis to clients and managed a global foreign exchange analysis team. As an expert on G20 currencies, Kathy is often quoted in the Wall Street Journal, Reuters, Bloomberg, Marketwatch, Associated Press, AAP, UK Telegraph, Sydney Morning Herald and other leading news publications.

She also appears regularly on CNBC’s US, Asia and Europe and on Sky Business. Kathy is an internationally published author of the bestselling book Day Trading and Swing Trading the Currency Market as well as The Little Book of Currency Trading and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game all published through Wiley. Kathy’s extensive experience in developing trading strategies using cross markets analysis and her edge in predicting economic surprises serve key components of BK’s analytic techniques.


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