Dollar Mixed Ahead of FOMC Start

The majority of analysts and economists expect that there will be two more rate hikes in 2018, though if enough members of the FOMC seem to be leaning toward a third that could move the Dollar higher.

A big question from consumers is, "Will this finally translate into more interest in my savings account?"

The economy is in something of a sweet spot for the Fed, but the central bank fears that may soon change.

The main risk event for the dollar this week will be the two-day federal open market committee monetary policy meeting, which is expected to conclude with the central bank raising U.S. interest rates.

The New Zealand dollar slipped and is poised to go lower with the focus firmly on this week's policy reviews at the US Federal Reserve and New Zealand's central bank, where the Fed is expected to hike while the Reserve Bank stays on hold.

That message has been echoed by Powell's colleagues on the Fed board.

The 1800 GMT announcement will also be the first under new Fed chair Jerome Powell. In other words, a 17.99% April will become 18.24%, shortly after the Fed's announcement. Trump has yet to appoint anyone to the role of vice chair for monetary policy. A failure to move the dots from three to four hikes could be interpreted initially as fairly dovish, but could still mean we see four hikes this year. This is part of the reason that stocks are so highly-valued now; due to low interest rates investors have been forced into riskier assets if they want meaningful returns, and that could end in a troublesome way. Or will the Fed acknowledge that, following a handful of years of inflation below 2 percent, allowing inflation above 2 percent is acceptable for a while?

The financial markets have been edgy for weeks, and Powell's back-and-forth comments have been only one factor.

While the Bank of Canada makes its own policy separate from the U.S. Fed, there are a number of ways that what happens in the U.S. tomorrow will affect the Canadian lending market.

Given the latest upbeat evidence on the USA economic performance and the potential positive effects stemming from the new tax overhaul, policymakers could back the scenario of "faster rate hikes than previously expected", with the Fed Funds futures implying a probability of 35% of four or more rate rises in 2018 compared to less than 10% three months ago. While markets have priced in a 0.25% rate hike, there is the additional concern that the Fed will signal a faster pace of hikes via its "dot plot".

The Fed will for the first time release its forecasts for the year 2020 on Wednesday.

Combine that with the repeated promise by Trump to boost US growth to four per cent - a level likely to launch serious inflation down the road - and signs of a pliant central banker could be seen as ominous. He underscored that based on interest rate differentials alone "the kiwi should be much lower".

Economists say that could change as the drag on the year-over-year figures from a mobile phone plan repricing falls out of the data later this spring. This was the smallest net long position since early January. Wage growth also remains softdespite a one-month pick-up that got Wall Street riled up.

Yet analysts are split over whether the Fed, which is wary of an early misstep under its new leadership, will raise policy tightening expectations until more price pressures are clearly evident, especially given outside risks to the economy such as a possible global trade war.

  • Zachary Reyes