The dollar is holding onto gains following Powell's testimony yesterday
Powell's testimony leaned more towards the hawkish side, and that has given the dollar a boost for the time being. But the debate on three versus four rate hikes this year remains a big question.
The base case for the market is three rate hikes, as we have been spoiled by the Fed on that notion since December. Anything less, and it's going to be hell for the dollar. Status quo, markets are going to question is there a reason to be more bullish on the dollar than the present?
Times are changing. We're moving into more hawkish times globally. Asian central banks are beginning to raise rates. We saw that with South Korea and more recently, Malaysia. The ECB is looking towards tightening monetary policy. The BOJ is starting to open the door towards tightening as well, though there is still quite some time before this comes to fruition but it's a change in thinking.
The market expects the Fed to take the hint from what's going on elsewhere and step up a gear. But three rate hikes itself is a tall order for the Fed, as they look to balance inflationary pressures, a steadily growing economy, and the nation's twin deficit.
If the Fed does move towards four rate hikes this year, you have to ask yourself just how bullish can the dollar get from hereon? We saw three rate hikes in 2017, yet the US dollar fell in every single quarter on the year.
Quite honestly, Powell and the Fed would certainly like more flexibility in that department, so overshooting on forecasts (dot plots) so early on in the year is going to tie their hands quite a bit when it comes to flexibility in managing rate hikes.
In my view, if the market is expecting the Fed to err towards promising four rate hikes in the coming FOMC meeting, the disappointment is going to largely outweigh the optimism surrounding that expectation.
The Fed will meet next on 20-21 March, where they will also release their infamous dot plots projection.
