US: Fed Governor Brainard strikes a less dovish tone – MUFG

Lee Hardman, Currency Analyst at MUFG, explains that the US dollar has continued to strengthen against the other major currencies overnight supported by more hawkish Fed rhetoric as the Fed Governor Brainard who is one of, if not the most dovish member on the FOMC spoke overnight and stated that “assuming continued progress, it will likely be appropriate soon to remove additional accommodation, continuing on a gradual path”.

Key Quotes

“She struck a more upbeat tone over the outlook for the US economy stating that it is “at a transition” as she acknowledged that there had been an improvement in inflation and activity both at home and abroad. The external environment was described as “more benign than it has been for some time”. She even believes that there are increased “upside risks” to domestic demand. As a result, she now judges that risks to the outlook are “more balanced today than they had been for the preceding two years”. Overall, the comments will support expectations that the Fed plans to raise interest rates again as soon as this month, and follow through on its plans from the December FOMC meeting to raise interest rates three times this year. The further widening of yield spreads in favour of the US supports our outlook for the US dollar to strengthen further in the coming months.”

“As the Fed has become more confident about resuming rate hikes soon, the incoming economic data flow from the US has started to become more mixed. Business and consumer confidence surveys have improved materially since the election signalling that the US economy is likely to continue expanding at a more solid pace following on from the pick-up in growth in the second half of last year. The release yesterday of the latest ISM manufacturing survey which rose to 57.7 in February provided a further positive signal.”

“However, the hard economic data releases from early this year have been disappointing. In January the trade deficit widened more sharply than expected and personal spending was weak as well. As a result, it appears likely that the economy will again get off to a soft start to the year. At the current juncture the Fed is likely to view the softer growth at the start of the year as temporary. It fits with the seasonal pattern evident during the current expansion phase for the US economy in which it has tended to underperform in Q1 followed by a rebound in Q2. The Fed would become more concerned if employment growth slowed more materially as well. A weak NFP report for February is the main risk to the market’s view that a Fed rate hike this month appears increasingly like a done deal.”