Societe Generale argues that a mildly restrictive Federal Reserve stance and potential hawkish adjustments to the SEP could support the Dollar against G10 and EM currencies. The bank highlights the risk that an upward revision to 2026 PCE inflation may lead the FOMC to remove the single projected rate cut, which would be interpreted as hawkish for USD/G10 and USD/EM.

Hawkish SEP shift may lift Dollar

"The intellectual exercise around the Fed meeting is supposed to be slightly less complicated compared to other central banks like the ECB for three reasons: firstly, the current policy rate of 3.75% (upper target) is mildly restrictive. Secondly, as an energy exporter, the US economy and is less exposed to the exogenous oil supply shock. Thirdly, the Fed has a dual mandate: full employment and price stability. The latter, in respect of the ugly payroll numbers, almost invariably means that the one (median) rate cut in the dot-plot for 2026 will stay in the base case scenario."

"There is a small chance of course it won’t as the Fed calibrates the 4-sigma spike in oil prices. Miran and Waller are again likely to dissent, preferring a rate cut (inflation transitory, lower neutral rate, strong productivity). Herein lies the risk: if one or both members pull their dovish vote, the outcome will be interpreted as hawkish."

"Chair Powell’s penultimate press conference is unlikely to offer major new insights. Policy was appropriate at the last meeting and it will be considered the same today, without a strong bias either way. If the labour market keeps deteriorating, the next rate cut could be brought forward, this has been the mantra of the last year or so."

"The outside risk is that another an upward revision to PCE from 2.4% for 2026 compels the FOMC to remove the one cut for this year in the penultimate FOMC meeting chaired by Jay Powell. The hawkish adjustment would give USD/G10 and USD/EM a lift and tilt the Treasury curve from bull to bear flattening."

"Our US economist Jan Groen revised his Fed call to no change in 2026 and two cuts in 2027 based on a higher inflation path."

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