Trump policies, Fed rate decisions to be in focus in 2018

Philip McHugh December 29th 2017 - 2 minute read

·         Trump policies to be put to the test in 2018
·         Fed expected to deliver another three rate hikes
·         Republicans to lose Senate majority?

Trump legislative agenda to remain in focus
President Trump’s long and winding road to implementing some of his policy reforms was a major source of volatility for the US dollar this year. Now he has been granted his first major success in the form of his tax cuts, but will he finally get his legislative ball rolling in 2018? And will it matter?
While Trump has finally managed to pass his tax reforms, delivering substantial corporate tax cuts that he boasts will make the US economy more competitive, its impact on USD has been relatively lacklustre.
It seems many investors are sceptical on whether the tax cuts will fuel the spectacular growth promised by the President.
This scepticism possibly may also limit the upward potential of the US dollar in 2018, even if Trump manages to push through his other major policy promises, such as his ambitious stimulus plans.
Fed set to continue current pace of monetary tightening
The Federal Reserve will again be one of the main influences on the USD exchange rate over the coming year, as the US central bank is expected to deliver at least another three interest rate hikes in 2018.
Further tightening next year is likely to be a major source of strength for the US dollar, especially if political uncertainty continues to drag on the currency.
2018 will also see a change at the helm of the Fed, as Trump chose to break with tradition and replace incumbent Chair Janet Yellen when her term ends in February with his own nomination, Jerome Powell.
Powell is likely to be scrutinised by investors to see if he sticks with Yellen’s current pace of monetary tightening and maintains its targets to reduce the bank’s balance sheet.
However one factor which could dampen prospects for both the US dollar and the chances of additional rate hikes in 2018 will be the stubbornly-low US inflation rate.
Should inflation remain below the Fed’s 2% target for much of 2018 then investors are likely to fear that the bank could even delay further tightening until it realigns with policymakers’ targets.
Mid-term elections to break Republican stranglehold?
Although taking place towards the end of 2018, the US mid-term elections could prompt significant volatility in the US dollar throughout the year as markets speculate on whether the Republicans will lose their slim majority in the Senate.
Investors fear that the groundswell of animosity towards Trump and the Republicans that has built up over the last year will see many seats lost to the Democrats; something that will make it extremely difficult for the President to move forward with his plans for economic reform, likely weakening the US dollar.
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Friday, 29 December, 2017

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Written by
Philip McHugh

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