The GBP/USD X-Rate Slides on Trump + US Fed Hike Expectations

The US Dollar outperformed its rivals at the start of March thanks largely to the tone of senior policy-makers at the US Federal Reserve who have been on the airwaves over the course of the past 24 hours.

However, the big kick higher in the Dollar that many had hoped for heading into Donald Trump's eagerly-awaited address to congress did not materialise.

As a result, the GBP/USD exchange rate starts the new month at 1.2378 having fallen from 1.2587 at the start of February suggesting medium-term momentum is marginally negative.

But, it is important to remember that the exchange rate is still effectively caught within a range that has been in place for four months now, to trigger a notable break Trump needed to deliver something fresh:

"Some USD strength before and after the US speech during Asia hours took cable to new lows since 8 February. The pair has now traded below that support at 1.2385 area and is likely going to see further downside, but expecting it to be supported between 1.2320-1.2350," says a note from the spot strategy desk at UBS.

For today, UBS are looking to buy dips into that region with a stop below 1.2300, targeting a move back towards 1.2420-50.

The Federal Reserve Points to a March Interest Rate Rise

"The Dollar has surged higher today. I don’t think the trigger was Donald Trump’s speech, because that was short on detail. Instead, it is the sharp rise in the probability of a Federal Reserve rate rise in March," says Fawad Razaqzada at Forex.com.

The Fed Funds Futures have been rising even before Trump spoke and now point to an 80 per cent probability of a rate hike at the Fed’s next meeting on 14-15 March.

"To put things into context, just last week this stood at under 35%," says Razaqzada, so immediately we can see a pro-USD shift in market positioning on the Fed’s intentions.

The Dallas Federal Reserve’s Robert Kaplan started the shift in expectations after stating that one needs to take advantage of “windows of opportunity” when it comes to policy moves.

The Fed would have to raise interest rates "sooner rather than later means in the near future," Kaplan told journalists after speaking at an event with university students in Norman, Oklahoma.

The San Francisco Federal Reserve’s President John Williams meanwhile told an audience at the Santa Cruz Chamber of Commerce that March was under “serious consideration” when it comes to a rate hike.

The New York Federal Reserve’s William Dudley told CNN that the case for a move had become “a lot more compelling.”

“Yellen has an opportunity to push this even further on Friday with a speech on the US economic outlook. With the “quiet period” ahead of the March 15th FOMC approaching quickly, this may be the last chance for the Fed to force the issue on March,” says Sue Trinh, Senior Currency Strategist at Royal Bank of Canada in Hong Kong.

Trump Does Enough to Keep Dollar Moving Higher

It was the intervention of President Trump that we felt would have the potential to really shake the US Dollar however it appears the net effect of Trump has been neutral.

“President Trump’s speech was hailed as more optimistic and presidential in tone but did not go into the policy specifics. Broadly, he reiterated that the US will get tough on trade, implement ‘massive’ tax cuts, $1trn in infrastructure, repeal and replace Obamacare, and cut regulations,” says RBC Capital’s Trinh.

Trump’s first congressional address was short on details and therefore leaves investors in wait-and-see mode.

As expected, Trump announced significant rise in defence budget and the reinforcement of immigration laws.

As we noted yesterday however, the economic impact of the increase in defence spending is likely to be minimal owing to the multiplier effect being poor on this segment of the economy.

Trump reiterated his focus on jobs creation and cited that many US companies including Ford Motors, Wal-Mart and Softbank Group announced “billions of dollars in investment” which would create “thousands of new American jobs”, without however giving accurate numbers and a clear strategy for the future.

“The freshly elected US President said he would spend up to $1 trillion in infrastructure, twice as much as $500 billion hinted following his election. However, he has avoided key subjects such as the financing of the extra spending, the federal deficit, amendments to regulations and the banks,” notes Ipek Ozkardeskaya at London Capital Group.

The analyst also reflects that the US Border Adjustment Tax plan, aiming to replace the corporate income tax by 20% increase on imports and domestic sales, failed to gather an unanimous consent, given that the import-driven businesses as retailers, carmakers and refineries opposed to the plan, while export-driven businesses were delighted to be exempt of taxes.

The US Dollar will therefore require further details if it is to reignite it’s long-term period of appreciation in convincing fashion.