The Dollar enters FOMC day after having shown some resilience over the past few sessions. A push-back against a pivot and rate-cut speculation could hit risk assets and lift the Dollar, economists at ING report.
Chair Powell may see little interest in sounding materially less hawkish just yet
“We are in the camp of expecting Powell to maintain his hawkish rhetoric despite this appearing less appropriate given the backdrop of slowing inflation and growth. This outcome may ultimately have some negative implications for risk and give the Dollar some support, as bets on a pivot, and potentially on rate cuts, are scaled back. Any communication missteps or deliberate dovish tilts, on the other hand, can surely revive that Dollar bear trend that appears to have halted lately.”
“We also have some US data to watch today: ISM manufacturing, ADP payrolls and JOLTS jobs openings. Substantial surprises on those releases are likely needed to drive major Dollar moves ahead of such a big event like the FOMC.”
See – Fed Preview: Forecasts from 16 major banks, dialing down rate hike to 25 bps
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As global markets continue to be rocked by turbulence caused by the coronavirus pandemic, uncertainty in the financial sector is reigning supreme. In the United States, the prospect of a Federal Reserve (Fed) policy shift to become more hawkish – that is, to be less accommodative and more aggressive to reign in economic expansion – could lift the US dollar value.
This opinion, expressed by ING, the Dutch multinational banking and financial services corporation, is based on speculation that the Federal Reserve could begin to take more outwardly hawkish steps towards monetary policies, undoing the damage caused by interest rate cuts implemented earlier this year.
The possibility of a hawkish Fed policy is prompting market forecasters to place more optimism into the US dollar going forward. A stronger dollar is a hallmark of economic strength, both internally on the US market and externally with other major currencies.
The shift to a hawkish stance could be due to a number of factors, such as rising inflation or a wage growth increase – both of which could help to reduce the US deficit a great deal. The combination of these potential triggers, even though nothing is set in stone, could be enough to push an interest rate hike in current conditions, according to ING.
Ultimately, investors in foreign exchange markets could stand to benefit from a hawkish Fed in the near future, with a steady upward trend in the dollar likely to follow. However, the US central bank is expected to continue to remain on a neutral footing for the foreseeable future, with any moves towards hawkishness unlikely until at least the fourth quarter of 2020.