Tighter polls or tighter Fed – either way expect the dollar to stay firm Fed officials have been on a clear mandate in recent months to highlight that the US economy is running hot and this week’s 3Q16 GDP data (Fri) will throw some light on the validity of these hawkish statements. Our economists are looking for a slightly above consensus 2.6% QoQ annualised print – while on the Goldilocks scale this is nowhere near “too hot” (or even “just right” for that matter), it is still indicative of the fact that the US is one of the few remaining bright spots in a low global growth backdrop.
We expect Dec rate hike expectations to stay anchored within the 65-70% probability range this week, with Fed talk (Dudley, Bullard and Evans) to stick to the hawkish script. Yet, markets should be wary of a tightening and not necessarily one stemming from the Fed. The US Presidential race is in its home straight and with just over two weeks left, investors remain somewhat impassive to the risk of a shift in the US political paradigm. A Clinton victory is by no means a guarantee; while the Real Clear Politics average of all polls puts the Democratic nominee at a seemingly unassailable 6-point lead, there is evidence of Trump regaining some lost momentum in key battlegrounds.
We are wary of a potential complacency creeping into markets (similar to what was seen ahead of the Brexit vote) and an anticipation of a tighter race over the next few weeks will likely keep global risk appetite at bay. We expect the USD to hold onto its recent broad-based gains, with the DXY to continue trading at a 7M high (98.00-99.00).
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