Bullish message peak for the USD

The Fed rose 75 basis points to 3.00-3.25% as expected and with high expectations ahead of the latest FOMC meeting, the Fed was expected to affirm the 4.5% terminal rate set by STIR markets to maintain bullish sentiment around the USD. In this case, Jerome Powell delivered an important hawkish message bringing the rate of terminals to 4.6% for 2023, against 3.8% previously. Powell confirmed the dot plot in his statement saying that rates are likely to reach the dot plot levels.

It was a hawkish statement and it kept the USD bid going. However, where does the USD go from here? On the one hand, we can see the Fed maintaining the hawkish message supporting the USD, but on the other hand, this seems to be the peak for the USD. With STIR market terminal rate expectations and Fed prices identical, two would have to be a new catalyst for further USD strength. So at this point it would seem reasonable for the USD to top. Who is left to buy the USD and with what expectations?

It is possible that the risk aversion sentiment related to the Russia/Ukraine risk could keep the USD auction going. We could also see firmer inflation in the United States, which may push the terminal rate up towards 5%. However, this seems a difficult order. So, we might be close to the USD peak. Timing is always the issue and incoming data will be key, so be nimble and flexible.


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Carol N. Valencia