Fed Is Unlikely To Hike Rates Aggressively
Today, we have published the fifth and last document in our series on inflation and what it means for financial markets. In this document , we look at the FX implications of the inflation and fixed income out look out lined in the first four pieces, Part 5: FX and inflation - US inflation outperformance + comfy Fed = weaker USD.
This morning we also published ECB Preview - Striking a compromise, 2 March, ahead of next week's meeting. In short , we expect the ECB to strike a compromise between the doves and the hawks by removing the QE flexibility bias but have no discussion on rate hikes. We expect Mario Draghi to strike a relatively dovish tone at the press conference.
Global market sentiment remains heavily influenced by developments in the US amid rising speculations that the Fed could soon signal a higher tightening pace whilst the risk of a global trade war has risen on the out look of more protectionist US policies. The US fixed income rally has continued and most Asian equity indices have followed US counterparts into red territory.
Yesterday evening, US President Donald Trump announced that his administration contemplate imposing substantial tariffs on imports of steel and aluminium. We emphasize that while higher tariffs create a worse growth-inflation trade-off, both steel and aluminium only make up a very small part of US imports. However, the move is likely to trigger retaliation from the EU, Canada and China meaning that the risk of a global trade war that potentially could derail the global recovery has risen considerably on the announcement.