HSBC’s Willem Sels and Lucia Ku highlight that the new Fed Chair’s hawkish tone supports expectations that US policy rates will stay unchanged through 2026 and 2027, reinforcing Dollar credibility. They note consensus earnings growth above 10% for most S&P 500 sectors and maintain an overweight stance on US equities while turning more bullish on the USD over the coming months.

Fed stance underpins Dollar strength

"In terms of policy rates, markets have now priced in a more hawkish scenario after the new Fed Chair emphasised tackling inflation, reinforcing the Fed’s independence and the USD’s credibility. We maintain our view that rates will remain unchanged in 2026 and 2027, although the upside risk has increased."

"Given these positive drivers and our strong belief that the AI innovation cycle is here to stay, driving stronger demand for US assets, we remain overweight on US equities and are more bullish on the USD. We would view any short-term market volatility as a buying opportunity while remaining diversified with quality bonds, gold and alternative assets."

"With a stronger USD, EM local currency bond returns are less likely to be boosted by the FX component. Our downgrade is also warranted by macro headwinds and higher risk of fiscal slippage in some EM economies."

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