Yesterday’s FOMC decision largely delivered on expectations – a 50bps hike and a little more detail on the start to the Fed’s balance sheet reduction plans. The USD wobbled following the FOMC decision and economists at Scotiabank think the outlook for the USD is more neutral now as a consequence of the Fed’s messaging.
“With swaps already reflecting expectations that the Fed Funds target rate will nearly reach 3% in early 2023, there is little chance of short-term rates rising that much more – at least for the next few months until the Fed has a better chance of assessing whether rates need to be more restrictive. In effect, the Fed’s tightening plans now look to be fully priced by markets.”
“We don’t expect the USD to weaken sharply; it is likely to remain well supported on dips, given where domestic yields are. Higher domestic rates also make the USD an expensive short from a speculative point of view. Rather, we think the USD trend is likely to transition into a broad, choppy, sideways range trade.”
“The DXY’s price action on the week so far supports the notion of a tentative stall in the USD bull trend; a spot close on the week at or very near current levels (103.2) would put a Doji candle on the weekly chart which is a classic stalling signal and could precipitate a corrective drift in the index back to the 99/101 zone in the next few weeks.”
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