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A quote comes to mind when reflecting on the headlines of the past few days: “There are decades where nothing happens; and there are weeks where decades happen.” It seems like the past week has taken the form of the latter, where self-induced controversy after controversy has piled upon the Trump administration.
It was only just yesterday that we stated that, “More time spent by the Trump administration fighting the media or putting out self-induced controversies means less time spent working on legislation, never mind the fact that these self-induced controversies mean that bipartisan support for passing legislation is all but dead.”
Indeed, the Trump administration’s inability to have any significant period of time without drama has become a veritable albatross around the US Dollar’s neck. It has become increasingly difficult for Republicans to focus on their fiscal agenda, and time will now be spent sitting in hearings listening to testimonies rather than enacting legislation. Markets have completely discounted any of the fiscal stimulus hopes that sent the US Dollar soaring after the November presidential elections, with the DXY Index trading below its closing level on November 8.
Without fiscal stimulus, traders don’t think that the Federal Reserve will be justified in its aggressive rate hike timeline as previously laid out: hikes in June, September, and the beginning of the balance sheet normalization process in December. While the odds of a June hike are still lofty at 94% (albeit lower than the 100% they were at last week), odds of a third hike in 2017 have evaporated: Fed funds show a 27% chance of a hike in September and a 44% chance of a hike in December. Last week, rates markets were pricing in a 52% chance of a hike in September and a 63% chance of a hike in December.
The only thing that could possibly lift the US Dollar back up is a rebound in economic data, but unfortunately for the greenback, this is a very quiet week on the economic calendar (no ‘high’ rated events). Although data thus far through Q2’17 has been decent – the Atlanta Fed’s GDPNow forecast shows +4.1% growth for this quarter – FX markets just don’t seem to care.
