On the political front, the US is expected to have a number of uncertainties.
Leaving aside an unpredictability stemming from the US President’s character and actions until now, political uncertainty is expected to arise also by more institutional factors.
The country entered 2019, with a partial government shutdown which was a result of a conflict between the Democrats controlled House of Representatives and US President Trump, over the funding of building a wall along the US southern border.
As now Democrats have control over the House of Representatives, we could see the conflicts like the before mentioned spreading, or becoming more often which in turn could create considerable uncertainty in the US political stage and in the long run hurt confidence in the local financial markets in particular.
Another issue causing political and economic uncertainty would be the US-Sino trade wars.
Should the tensions between the two economies continue, it could cause a substantial slowdown for the US economy and impair the prospects of the equity markets not only in the US but also worldwide.
Positive Effect from 2017 tax cut?
Macro-economically, we could see the positive effects on growth, of the 2017 tax cut, slowly fading away as the situation progresses towards normalization.
A possible replacement, which could stimulate growth again, would be increased government spending.
Both Democrats and Republicans seem to agree that more infrastructure spending is necessary.
However, it should be noted that such spending could be limited, given the high national US debt as well as differences of opinion between the two parties, on how and in which sectors to spend.
The labour market could remain tight though and unemployment at rather low levels.
Also, the average earnings could remain at high levels and cause some inflationary pressures.
Never the less the Fed seems determined to maintain inflation around 2%; however, it may not have to require hard efforts for it to be maintained.
What to expect from Fed’s interest rate hike?
On the monetary front, the Fed’s interest rate hike path is expected to affect the USD direction substantially.
For the time being the bank has signaled through the dot-plot that one more rate hike is in the cards.
We see the case for the bank to proceed very gradually in such a scenario however, we also accept that there is a high chance for the bank not to hike rates at all in 2019.
Risks could be tilted to the upside should the US-Sino trade frictions be resolved.
Never the less, should the bank not hike rates in 2019, we could see the charm of the USD slowly weakening as interest rate differentials with other banks may no longer grow, or may even shrink, causing the greenback to weaken against a number of its counterparts.
Such an effect could be amplified, if other banks proceed with policy normalization, such as the ECB which could imply some kind of monetary tightening (either through rate hikes or reduction of QE programs) in 2019.
Yet investors could also be doubtful if such a scenario would take place.
Overall, we could see the USD weakening over the next year, however, for such a scenario to occur, many factors will have to coincide.
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