Frenemies? Trump Vs. The Fed

It is unclear if the Fed and White House are on one team but there is no open confrontation, yet

A reasonable US Federal Reserve rate is the key component to the US dollar value on international foreign exchange market. The higher the Fed’s rate is, the stronger the US dollar is.

Subsequently, softer monetary policy result in a weaker greenback against majors and national currencies of emerging markets. However, the regulator’s monetary stance is quite unpredictable both for traders and investors and, which is quite odd, for the US president, regardless of the political party he represents.

Quite often, the policy suggested by the head of the state is directly opposite to what the Fed is lobbying. For instance, the central bank and the White House quite differently assess the condition of the national economy.

Retail traders

While the president reports growth and ready to push the rate up, the regulator, sticking to its conservative view, postpones the increase repeatedly. In this view it was no surprise when sweeping to power the current US president at first hand replaced Janet Yellen, one of the fierce Trump’s critics.

Still it is impossible to say that the Fed and the White House are now in one team but there is no open confrontation.

And this is when traders relying on the Fed’s stance should make a note. Now it is more likely that the regulator will go hand in hand with the US government. In this case all the signals the White House is making while assessing the national economy can be taken into account, just like the Fed does.

Now the US economy is demonstrating good momentum, rarely logging disappointing figures form the labor market. Thanks to this bullish dynamic, the markets are anticipating a 0.25% increase in rate and yet more 3-4 hikes in the upcoming 2019.

And here we should make another note and consider this number of hikes as the basis. All further forecasts regarding the number of rate hikes will be based on this formula – one hike in December 2018 and 3-4 hikes in 2019.

As for the earning opportunities, the US currency has partially traded off all potential from the anticipated increases, but every Fed and White House’s reinforcement will be able to give a lift to the dollar in range of 0.3-1.4% during this period.

However, confirmation of the old and widely expected forecast will translate into small changes. On the other hand, refutation of the well-worn line will result in bigger fluctuations. In case the regulator fails to raise the rate in December and postpones the tightening of the monetary policy for the Q1 of 2019, the dollar will imminently drop by 1-2%.

In case the Fed continues its hawkish stance in 2019, long positions on the US dollar of thousands and even millions of traders around the globe will go in other direction and this is a good opportunity to profit on positions against the dollar holding them in EUR or some “safe heaven” currencies like JPY or CFH.

And finally this is time for the last remark. The US dollar should and will grow at the end of 2018 and during the whole 2019 if the US economy stays away from any internal cataclysms.

External ones like military intervention in particular conflicts, sharp drop in oil prices, political uncertainty and other, will only give potential headwinds to the dollar value. In such scenarios the regulator will for sure stick to its tightening monetary stance.

Got a news tip? Let Us Know