USD Poised to Reverse amid Expectations of Fed's Exit| Influencer‘s Insight •Jasper Lo

A stream of good news hit the US financial market, with the $1.9 trillion stimulus package on track to be voted on and passed by Congress next Friday, and with the soaring stocks bringing about an air of optimism. The US economy has recovered vigorously according to its latest economic indicators. If the positive dynamic continues, chances are the market will speculate on the Fed's tightening monetary policy.

The market has been inspired by the latest US core PPI, PPI, core retail sales, and retail sales, which were all significantly better than expected and previous values. These prints not only reflected a reviving economy, but also fueled inflation. The Fed officials in the minutes of its January 27 meeting reiterated it would be some time before conditions to scale back their massive bond purchases were met. Nevertheless, both the stock market and the economic performance have embraced further growth. Although Powell's downbeat economic outlook after the last meeting surprised at the time, the fact is the US economy is regaining energy an an amazing pace.

While the US 10-Year Treasury yield continues climbing, stocks have been refreshing new record highs, and economic and inflation readings have risen sharply. Besides, the interest rate futures of the Chicago Mercantile Exchange show that the chance for a rate hike during September to December has picked up to 11.8%. All these signals indicate that the financial market is betting on the Fed's tightening monetary policy. The market will speculate on a rate hike in the case of no quantitative easing. But since the Fed is adding money supply, the market now firstly expects the Fed's exit. I believe the Fed will be the first central bank that gets off the market, which will put a large premium on the US dollar. Moreover, the soaring US 10-Year Treasury yield and the potential hike in interest rate futures will also bode well for the dollar.

With that said, Biden's $15-per-hour minimum wage proposed in the $1.9 trillion package propel the spiking inflation higher. Some analysts predicted that the Fed would maintain the weak dollar instead of rushing into a rate hike before the inflation went 2.5%. But this target is possible to be overshoot in the second half of the year based on the current progress. Repeatedly, I expect the Fed to raise the rate with a chance of 0%, and the financial market will speculate on the Fed's exit rather than a rate hike. Traders must keep in mind that a market exit will lead to a dollar surge or even reversal. In general, I believe the strong rebound in US economic data is not just a passing fad, but building up a head of steam.