© Robert Martin
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Barclays sees the US economic expansion as likely being intact, and what we base it on is the US labour market as being the best indicator of where we are in the cycle. If we go back in the fourth quarter, we see US employment growth, where the economy added 841 000 jobs according to the establishment survey. At that level, which is 280 000 jobs per month on average, we do not see any signal from the labour market whatsoever that expansion is coming to the end. That being said, the Q4 data was pretty weak, but we are looking for a bounce back in that and we view most of the mentioned weakness as transitory factors.
When announcing the rate hike at the end of the last year, the Federal Reserve signaled other 25 basis point increases in 2016, a view echoed by the officials in recent speeches. However, a lot of analysts argue that the Fed could actually step aside from its "liftoff" policy, given the global economic state, slowing China, sinking stocks and oil price collapse. Do you agree with this suggestion and expect it to be implemented by the Fed? Or can we talk about another rate hike in the foreseeable future?
At Barclays we continue to call for three additional rate hikes this year. Hence, we still expect the Federal Reserve to hike rates in March, September and December in 2016. The primary reason for that is we are still quite constructive on the US economic growth, and we believe that the US economy will continue to expand this year at rates roughly in line with what they did last year. Also, we expect the unemployment rate continuing to decline, reaching 4.3% by the end of 2016.
What is going to weigh against that outlook and influence the Fed's mind, even as activity improves, is that the inflation outcomes for this year are likely to be quite soft, due to a drop in oil prices and an ongoing appreciation of the Greenback. Nevertheless, we believe that the Federal Reserve pays a lot of attention to the transitory declines in inflation and stays on its hiking cycle.
What will be the major drivers for Greenback in Q1 this year and what are your forecasts for EUR/USD, USD/JPY, USD/GBP in the short and long term?
We believe that relative economic strength is the primary drive of the US Dollar this time and a healthy US economy compared to a relatively weaker activity in emerging markets and somewhat tepid activity in Europe will contribute to ongoing USD strength. We expect the US Dollar to stay more or less constant against the Japanese Yen and appreciating modestly versus other counterparts.