Fed to leave the door open for another hike as soon as July, helping to dampen further downside for USD – MUFG

The US Dollar has corrected modestly lower ahead of the upcoming FOMC meeting. Softer USD is anticipating that Fed will slow pace of hikes, economists at MUFG Bank report.

Will the Fed rock the boat in the week ahead?

The last test will be the release tomorrow of the latest US CPI report for May just ahead of the FOMC meeting on Wednesday. Unless there is a significant upside surprise for core inflation measures, we expect the Fed to leave rates on hold this week but signal that it is not the end of the hiking cycle and leave the door open for another hike as soon as July. It should help to dampen further downside for the US Dollar. 

The most disruptive outcome for the FX market would be another hike forcing the US rate market to price in a higher peak for the tightening cycle beyond 5.50%. It could trigger at least a temporary shake out of popular carry trade positions.