US Dollar firm as RBA sends huge wake-up call to global markets – BBH

Economists at BBH offer a brief insight into the US Dollar price action and a preview of the highly-anticipated FOMC policy meeting starting this Tuesday.

Key quotes:

“DXY is trading higher for the fourth straight day near 102.294, the highest since April 11 and on track to test the April 10 high near 102.807.  Break above that would set up a test of the April 3 high  near 103.058.”

“The Reserve Bank of Australia sent a message that should reverberate across global markets.  By hiking rates unexpectedly today, the RBA action underscored just how difficult it is proving to get stubbornly high inflation back to target. Simply put, it is obvious that interest rates around the world will go higher for longer.  It’s really that simple and so any notions of quick monetary policy pivots are misguided. We believe that any easing by the major central banks is a 2024 story.  Period. In particular, we continue to believe that the markets are underestimating the Fed’s capacity to tighten policy and to then keep it there for an extended period.  This should be a huge, huge wakeup call for investors that have become way too complacent about a Fed pivot.”

“Chair Powell acknowledged that the Fed considered a pause but added that it was too soon to say how Fed policy has been impacted by the banking crisis.  We think that still holds true now and so we expect the Fed to leave the door wide open to further hikes.  Updated forecasts and Dot Plots will come at the June meeting, which we believe is more in play than markets believe.  Of note, WIRP now suggests 25% odds of another hike June 14 and we think this is likely to move higher.  Yet the market is still pricing in a cut by year-end and we continue to view this as highly unlikely.”