Forex News 24
  • RSS

news

Does a higher US neutral interest rate mean stronger USD?

Does a higher US neutral interest rate mean stronger USD?
админ
27/02/2018

interest rate 300x199 - Does a higher US neutral interest rate mean stronger USD?

With Fed Chair Powell testifying to Congress tomorrow, there’s growing noise this week over the Fed’s neutral interest rate – and a potential upgrade in light of greater optimism over the US and global economy, according to Viraj Patel, Foreign Exchange Strategist at ING.

Key Quotes

“In reality, we probably won’t know of any change to the Fed’s neutral interest rate assumptions until the March FOMC meeting. But even if we assume that there is a consensus revision higher, there are two caveats to consider before concluding whether this will lead to USD strength:

  • Is the move higher in the US neutral interest rate estimate specific to the US economy?
  • Have markets already priced this in?”

“Rise in global neutral interest rate a more convincing argument for a higher US r-star

  • Neutral interest rates are typically driven by long-run factors specific to a particular economy such as productivity and population growth – as well as common global factors (typically captured by the global neutral interest rate).
  • While the Trump tax package is arguably a reason to revise one’s estimates for the US neutral interest rate higher, the ambiguous long-run effects of tax cuts on productivity and demographics – as cited by both private-sector economists and Fed officials – suggests this would be an unlikely reason for any Fed neutral interest rate upgrade.
  • Instead, we suspect that it is an upward revision in the global neutral interest rate – underpinned by higher global growth expectations – that may be the bigger driving force for any optimism over a higher US neutral interest rate.
  • By definition, any rise in the global neutral interest rate will also be reflected in the EZ equivalent – and given that it is the relative EZ-US ‘r-star’ differential that matters for EUR/USD, we would argue that any near-term optimism over a higher US neutral interest rate estimate would not, in fact, lead to isolated US dollar strength.”

“Markets have priced in the rise in US (and global) neutral interest rate story

  • None of this should be ‘new news’ for global investors given that we’ve had three-six months of the strong global growth narrative dominating markets. Indeed, when we look at a range of future expected short-term interest rates across the developed market space, there has been a concerted uptick in estimates for expected long-run policy rates – corroborating the idea of an upward revision in the global neutral interest rate of around 25bps.
  • In the FX world, where it’s all relative, any synchronised movement higher in interest rates should, in theory, have limited impact on any one currency. Moreover, we would argue that it is the relative mispricing of the terminal policy rates that is the key for currency markets over the coming quarters.
  • With the Fed tightening cycle all but priced in, the focus is on the rest of the world – namely Europe and Japan – where there is greater scope for positive monetary policy adjustments to lead to further isolated EUR (and to some extent JPY) strength. In contrast, a boring and predictable Fed – as we are expecting under the leadership of Jerome Powell – is unlikely to do much for the US dollar in the grand scheme of things.”

Source

Related ItemsCongresscurrencyEUREuropeFedFed’sFXinterest rateinterest ratesJapanmarketmarketsmonetary policyoptimismrateratesrisetaxTrumpUSUS dollar

Leave a Reply

Cancel reply

Your email address will not be published. Required fields are marked *

Anti-spam: complete the taskWordPress CAPTCHA


news
27/02/2018
админ
Related ItemsCongresscurrencyEUREuropeFedFed’sFXinterest rateinterest ratesJapanmarketmarketsmonetary policyoptimismrateratesrisetaxTrumpUSUS dollar

More in news

273116ff712463a8fe797bc26d4bddd2 400x240 - Major policy change for the FED

Major policy change for the FED

админ30/08/2020
Read More
5ecd652efa96beb5e9daab8a81713e20 400x240 - Powell expected to preview Fed’s policy framework

Powell expected to preview Fed’s policy framework

админ27/08/2020
Read More
1cfd53e4dc84605be8f34b32e1fc08ff 400x208 - European markets look defensive

European markets look defensive

админ26/08/2020
Read More
Scroll for more
Tap

Last news

  • 273116ff712463a8fe797bc26d4bddd2 95x60 - Major policy change for the FED
    Major policy change for the FED
    news30/08/2020
  • 5ecd652efa96beb5e9daab8a81713e20 95x60 - Powell expected to preview Fed’s policy framework
    Powell expected to preview Fed’s policy framework
    news27/08/2020
  • 1cfd53e4dc84605be8f34b32e1fc08ff 95x60 - European markets look defensive
    European markets look defensive
    news26/08/2020
  • cbda506728f805be55e3597fd478b623 95x60 - Another record-setting session for U.S. stocks futures
    Another record-setting session for U.S. stocks futures
    news25/08/2020
  • 3c51d052540d35f9b8497fc0b1942d58 95x60 - $50M worth of cryptos or more left China
    $50M worth of cryptos or more left China
    news23/08/2020

Tags

american Asia Bitcoin China cryptocurrency currency Dollar dollar index economic Economists EUR euro Fed Federal Reserve forex futures GBP GDP Germany Index inflation interest rate interest rates Japan losses lost market markets monetary policy Oil price prices rate rates retail rise risk sales trade trade war trading Trump UK United States US

Copyright © 2019 Forex News 24, all rights reserved.

Making sense of the weak USD
Spotlight on Powell