US Dollar Index to hit new highs on a hawkish FOMC signal – MUFG

The US dollar is staging a broad-based rally ahead of the Fed’s latest FOMC meeting this week. In the opinion of economists at MUFG Bank, the US Dollar Index could reach new highs in case the DOTs surprise to the upside.

USD rallied sharply when dots were last updated

“Market participants are understandably wary of the Fed delivering another hawkish surprise like in June when the Fed last updated their projections for the Fed Funds rates, which is encouraging a stronger US dollar.”

“We do not expect the Fed to announce their QE taper plans this week but we do expect Chair Powell to repeat that if the ‘economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year’. A message like this is unlikely to shift market expectations with the consensus for an announcement of tapering in either November or December.”

“Short-term rates jumped in June after the FOMC meeting when the DOTs surprised to the upside. We don’t expect a repeat of that this week. A repeat of the June profile with a similar pace for 2024 as 2023 would be a relief to the market and likely see some modest USD depreciation.”

“If the DOTs confirm a median hike in 2022 that would illicit the biggest FX reaction with the DXY likely to trade at new year to date highs. A 2022 median DOT would clearly undermine Powell’s attempts to break any link between tapering and rate hikes.”