Stronger USD heading into year-end amid higher terminal rate expectations – MUFG

The US Dollar has continued to trade at stronger levels after the Fed dashed hopes again for a dovish policy pivot. Higher terminal rate expectations for Fed's hiking cycle are set to continue strengthening the greenback into year-end, economists at MUFG Bank report.

The Fed is shifting to plans for a slower but more extended hiking cycle

“The US rate market is now pricing in 62 bps of hikes at the December FOMC meeting as it weighs up whether the Fed will deliver one final 75 bps hike or step down to a 50 bps hike.” 

“The updated policy statement added as well that the Fed would take into account ‘the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments’.”

“The comments signal that the Fed is shifting to plans for a slower but more extended hiking cycle. The increase in market expectations for the Fed’s terminal policy rate support our outlook for an even stronger US dollar heading into year-end.”