Fed: Powell will find difficult to support the dollar – Commerzbank

The market is quite certain that the Fed will hike the rate corridor for the Fed Funds rate by 75 bps. The reaction of the US dollar hinges on the publication of new “dots” and Chair Jay Powell's press conference, economists at Commerzbank report. 

Dots lyric and Powell prose

“In June the dots for late 2022 were largely between 3% and 3.75%. If they are revised moderately to the upside that is not a USD-positive surprise for the market but merely a confirmation of its own view. The money market is expecting Fed Funds rates of 4% for year-end 2022. That means a rise of the year-end 2022 dots has already been priced in.”

“Since the last dots were published the market is pricing in a higher maximum level for Fed key rates but one thing has not changed: the expectation that after that, interest rates will be reduced to the area just above 3% again. If the new dots were to suggest otherwise, that would very much constitute a USD-positive signal.”

“It is difficult for Powell to sound more hawkish than he did in Jackson Hole. I find it difficult to imagine more hawkish (and thus USD-positive) words.”

“Because Powell already sounded as hawkish as imaginable the risk increases that everything he says now will be interpreted (or misinterpreted) as less hawkish, as a change in direction and might have a more USD-negative effect.

“If the greenback is already trading at very high levels, it will get difficult to find arguments that would support it further.”

See – Fed Preview: Forecasts from 16 major banks, fast pace hiking cycle continues