Euro Declines Ahead Of Dutch Elections, Yellen To Stress Gradual Path Of Rate Hikes, ASX SPI200 Futures -10

The U.S. dollar index gained +0.44% on Tuesday as the Euro slipped -0.48% ahead of the Netherlands elections today, a Fed rate decision tonight and a slight miss in European data overnight. Today we will see the elections for the House of Reps in the Netherlands which is the first of four key elections in Europe in 2017. The market will be watching closely as polls suggest the decent potential for Geert Wilders Eurosceptic Party for Freedom (PVV) may win the most number of seats. The Dutch parliament typically forms coalition governments, and with other key parties stating they will not form a coalition with the PVV it is unlikely to upset the balance in Europe. Still the election will be seen as a bellwether for populist movements across Europe with elections in France & German to soon follow.

Tonight the key focus will be on the FOMC policy meeting with the implied probability of a rate hike at 93% according to the CME’s FedWatch. The hike itself is a foregone conclusion following consistent data and forward guidance by Fed officials having shifted market expectations towards March.  Instead the focus will be on the press conference by Fed chair Janet Yellen and the updated “dot plots” projected the expected path of the policy rate.

Yellen is likely to continue to stress the gradual path of raising rates and the median rate projection is likely to be unchanged. Recent economic data has been solid, but not significantly higher than expected to warrant upward revisions in the expected path of rates just yet. That situation could occur later in the year, particularly if progress is made by Donald Trump in relation to tax cuts, deregulation and fiscal stimulus. The Fed is also very cautious with its forward guidance managing market expectations, having only recently shifted expectations towards a March rate hike it is unlikely the committee will want to raise the expected path of future hikes, preferring to communicate this gradually.

The market will also been keen to hear around plans to reduce the Fed’s enormous balance sheet thanks the multiple round of quantitative easing. This will be increasingly discussed by the Fed at upcoming meetings, although no announcements are likely to be made until rates are at more normalised levels and the Fed has a plan in place to execute this. The balance sheet will also be wound down over a number of years at a gradual pace given the tighten effect this will have on the economy.

Overnight equity markets were generally lower as investors await the FOMC meeting tonight, in Europe both the Euro Stoxx 600 & DAX30 declined -0.31% & -0.01% respectively. In the U.S. the S&P500 & Nasdaq100 declined -0.34% & -0.23% respectively while bond yields globally were little changed. The ASX200 index finished flat on Tuesday, up just +0.03% and this morning we can expect a softer start to trading with ASX SPI200 futures down 10 points.

Data releases:

·         Australian Westpac Consumer Confidence (MoM Mar) 10:30am AEDT

·         Japanese Industrial Production (MoM & YoY Jan) 2:30pm AEDT

·         U.K. Unemployment Rate (3m Jan) 8:30pm AEDT

·         U.S. CPI (MoM & YoY Feb) 11:30am AEDT

·         U.S. Crude Oil Inventories (Mar 10) 1:30am AEDT

·         FOMC Rate Deicison & Economic Projections 5:00am AEDT

·         Fed Chair Janet Yellen Press Conference 5:30am AEDT

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This article was written by James Woods - Global Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via james.woods@rivkin.com.au or by phoning +612 8302 3631.

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