USD to suffer a further leg lower if Fed commits to slowing down the pace – MUFG

After its late October swoon, the US Dollar Index is up for the third straight day as critical central bank week gets underway. Unless the Federal Reserve cements a pivot, the greenback is set to remain on a solid foot, economists at MUFG Bank report.

US rate market is expecting Fed to signal slower pace of hikes ahead

“If the Fed does slow the pace of hikes in December it does not necessarily mean as well that the total amount of tightening delivered in the current tightening cycle will be less although that will be the initial assumption. It could be that the Fed slows the pace of hikes but eventually keeps hiking for longer. The US rate market though is expecting that as the Fed slows the pace of hikes at the end of this year, it will then quickly bring an end to the hiking cycle in the 1H of next year leaving the terminal rate at around 4.75%.”

“After correcting lower over the past week/month, the Fed will have to send a clear signal that it plans to slow rate hikes and sound more cautious over the need for further tightening to trigger a further leg lower for the US dollar in the week ahead.”