Jane Foley, Research Analyst at Rabobank, suggests that on any measure, the recent release of the US February consumer confidence reading was disappointing. Key Quotes “The plunge in the index coincided with a worse than expected outcome for the Richmond Fed manufacturing index with threw doubt over hopes that the weakness in the US production sector may be bottoming out. The sour tone of these data, however, were not matched by housing data which showed continued resilience, nor did they seem to deter the Fed hawks. True to her hawkish colours, Kansas City Fed President George remarked that a discussion over whether the FOMC could tighten next month “absolutely should be on the table”. Recently Fed Chair Yellen suggested that she did not want to rush into any conclusion about the impact of recent market activity and this theme was extended by Vice-Chair Fischer who remarked that “it is still early to judge the ramifications of the increased market volatility of the first seven months of 2016”. More generally, Fischer also demonstrated a hawkish bias. US wage inflation, which is currently around 2.5% y/y, has been ticking higher in recent months and, while it is still below the prerecessionary level of 3.5% or so, Fischer’s comments that “a persistent large overshoot of our employment mandate would risk an undesirable rise in inflation” suggests that he may still be in favour of hiking rates later this year. As it stands we see scope for two Fed rate hikes this year. While continued market volatility suggests there are downside risks to this view, the relatively closed nature of the US economy means it has some shelter from international shocks. The fact that the USD has moved below its recent highs should also bring solace for the external sector which had been showing some signs of stress. CFTC data suggest that speculators have been reducing long dollar positions since last spring. This coincides with the paring back of market expectations regarding Fed tightening. In recent weeks the market has completely priced out Fed interest rate moves this year. Given the recent signals from Fed officials, however, this move may be overdone and the selloff in the USD may have also been pushed too far. Following the slowing in the pace of US growth noted at the end of last year, US data will have to show a convincing improvement before it can feed a sustained increase in risk appetite. Even if confidence in the US economy improves, asset markets will still have to contend with tepid growth in Europe and slowing growth in China and many emerging markets. While we maintain the view that the USD will be able to claw back some ground vs. both the EUR and the JPY this year, we expect USD upside to be moderate. As we argue frequently the EUR and the JPY are funding currencies meaning these currencies are unlikely to fall significantly unless risk appetite rises across the board. We have tempered our USD/JPY forecasts and now forecast a move to 116.00 on a 12 mth view.” For more information, read our latest forex news.