Like the markets, we are expecting the Fed to raise its target range by 25 basis points (bps) to 1.50-1.75% during the March 21-22 FOMC meeting. We have placed a 90% chance of a rate hike in March. However, we will be looking for two clues during the March FOMC meeting. The essence of this meeting will be whether there will be a fourth rate hike. Also, we will be looking for any sign on policy normalisation.

We are of the view that a 25bps rate hike by the Fed in March will not have any major impact on the USD. Any material impact on the USD will depend on the tone of the Fed chair, i.e. how hawkish he is or otherwise. While a three-rate hike (3) by the Fed will not have any significant impact on the USD as it has been well priced in, we feel a fourth hike should also be potentially factored into the movement of the USD. The impact will be more of a near term one, allowing the USD to strengthen in the region of 1%.

However, in our view, the key challenge to the USD will be Trump’s policy. The focus will be on how the president steers his “America first” agenda play. We expect this to influence the USD in the medium term. On that note, we expect the USD to settle around the 86–87 levels by end-2018 and around the 84–85 levels in 2019.

Looking for two clues during March 21-22 FOMC

• Like the markets, we are expecting the Fed to raise its target range by 25 basis points (bps) to 1.50-1.75% during the March 21- 22 FOMC meeting. We have placed a 90% chance of a rate hike in March. However, we will be looking for two clues during the March FOMC meeting. The essence of this meeting will be whether there will be a fourth rate hike. Also, we will be looking for any sign on policy normalisation.

• While the markets are currently looking at four (4) rate hikes in total for 2018, we expect the Fed to maintain the three-hike (3) signal in total for 2018. Our first rate hike view is in March with a 90% probability, followed by June (70% probability) and the third in September (60% probability).

• Meanwhile, we also believe there is room for a fourth rate hike. This could happen in December which we have placed a 25% chance of it materialising. Room for us to raise the probability for a fourth rate will depend on several factors. First, it will be the tone of the US Fed chair, whether he is slanting towards more hawkish in the coming meeting though we expect him to reiterate that risks are “balanced” and will focus on inflation which is expected to rise gradually.

• The other indicators we will be watching closely are wage growth and the core inflation. Signs of wage growth firming up imply the demand-pull inflation is kicking in and should see core inflation rising. It will allow us to raise our probability for a fourth rate hike much higher.

• Besides, we are hoping for some guidance from the Fed on its potential normalisation of the policy rate. We believe the normalisation rate should be around 3.00%, which means there could be another two (2) or three (3) rate hikes in 2019. The number of rate hikes in 2019 will depend on the number of rate hikes in 2018.

USD will be impacted by Trump’s policy

• We are of the view that a 25bps rate hike by the Fed in March will not have any major impact on the USD. The reason being, it is more of a done deal scenario. Any material impact on the USD will depend on the tone of the Fed chair, i.e. how hawkish he is or otherwise. The impact will be more of a near term, allowing the USD to strengthen in the region of 1%.

• While a three-rate (3) hike by the Fed will not have any significant impact on the USD as it has been well priced in, we feel a fourth hike should also be potentially be factored into the movement of the USD.

• However, in our view, the key challenge to the USD will be Trump’s policy. The focus will be on how the president steers his “America first” agenda play. We expect this to influence the USD in the medium term. On that note, we expect the USD to settle around the 86–87 levels by end-2018 and around the 84–85 levels in 2019.

Source: AmInvest Research - 20 Mar 2018