MUFG’s Lee Hardman notes that the Fed’s latest policy update has lifted US rates and supported the Dollar, with the Dollar Index back above 100.00 and markets now pricing multiple Fed hikes. The updated DOT plot shows a clear shift toward tightening, though MUFG still expects no hike this year and sees upside risks to its weaker USD forecast for 2027.

Fed repricing backs stronger Dollar

"The US dollar has continued to trade at stronger levels overnight after strengthening sharply in response to yesterday’s hawkish Fed policy update. It has helped to lift the dollar index back above the 100.00-level and back closer to the year to date high of 100.643 recorded on 31st March. The Fed’s hawkish policy update is threatening to trigger a bullish break out for the US dollar more than offsetting the dampening impact from the US-Iran deal announcement over the weekend."

"Market participants have moved both to price back in multiple rate hikes from the Fed, and brought forward expectations for the timing of the first hike to September/October. A rate hike even as early as the next policy meeting in July is now judged as around a 1 in 3 probability."

"The updated DOT plot marks a significant shift from the last set of projections provided back in March when no FOMC participants wanted to raise rates. The change in views among FOMC participants has increased the likelihood of a modest tightening in response to the energy price shock although a rate hike is not a done deal. If the US-Iran deal leads to the Strait of Hormuz reopening soon and lower energy prices, and there is limited evidence of second round effects emerging then the Fed can still leave rates on hold this year."

"Overall, the Fed’s hawkish policy update should help to keep US rates and the US dollar at higher levels heading into the summer. If the Fed follows through and hikes rates it would reinforce the Fed’s upward momentum. We are not convinced though that a rate hike will be required, but acknowledge that there is a higher risk of rate hike in the second half of this year."

"It poses upside risks to our forecast (click here) for a weaker US dollar heading into next year."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)