Fading the USD remains premature as the outlook for core inflation is still troubling – TDS

The Federal Reserve hiked its policy rate by 75 basis points in June to the range of 1.5% to 1.75%. Save for a decent risk reprieve, economists at TD Securities do not think this necessarily marks an inflection point for the FX complex or even risk sentiment more generally. 

Nimbler still

“Fed officials delivered a 75 bps increase in the Fed Funds target range to 1.50%-1.75%. The Fed Chair argued that recent strong CPI data and rising inflation expectations led the Committee to opt for a larger rate increase at this meeting despite guiding markets for a 50 bps rate hike prior to the blackout period. The Fed remains nimble and ever more data-dependent.”

“We remain of the view that the Committee wants to get to their longer-term neutral policy rate rather quickly in the face of still robust demand and an unbalanced labor market. We expect them to do so with another 75 bps rate increase next month. In addition, while the Fed remains highly data-dependent, we do not anticipate inflation data will offer any respite in the short-term.”

“The Fed tries to buy optionality by more explicitly linking the size of hiking increments to MoM core CPI. We likely see a mild USD reprieve, but it remains premature to strategically fade the USD given the outlook for core is still troubling. We see growing risks of a perverse effect of higher rates to FX.”