Date: 11 Dec 2017

Friday’s US jobs data surely nailed on a further rate hike by the Fed on Wednesday, but if so then arguably that’s already priced into the foreign exchange market. Indeed “the 25bp hike in the federal funds rate that we expect on 13 December has been firmly embedded in market expectations since the end of September,” wrote HSBC last week even ahead of the US jobs data release. Nevertheless, HSBC now feels that “given recent developments on the [US] fiscal policy front” their own US interest rate forecasts for 2018 and 2019 now need changing. HSBC “had expected that it would take at least until the first quarter of 2018 for the [US] Congress to pass comprehensive tax reform. However, the legislators have moved more quickly than [HSBC had] anticipated… A joint conference committee is now being formed to work out the differences between the two pieces of legislation” and HSBC expects “that a joint bill will be agreed upon before the end of this year.” More pointedly, HSBC thinks “the proposed tax cuts are likely to be frontloaded and thus will have more of an impact on the economy in the medium term than we had anticipated.”

The net result is that HSBC, which had only been expecting further Fed hikes in December 2017 and March 2018, now forecasts a further hike in September 2018 and another in March 2019. Of course this is just one bank’s view but perhaps what should be of more interest to currency traders is the underlying realisation that the success of the Trump Administration in cajoling Congress to produce tax cut and tax reform legislation is potentially a game-changer. Friday’s strong non-farm payroll number and low US unemployment figure wouldn’t normally be the kind of data that would underscore the need for fiscal stimulus. Yet that is what’s in the offing. The Fed may feel it has to react to the changed circumstances. Dollar bulls might take note.

Written by Neal Kimberley, External Currency Analyst.