US Dollar: Fed hold to test recent resilience – ING

ING strategists Francesco Pesole and Frantisek Taborsky expect the Federal Reserve to keep rates unchanged, with two dissenters possibly voting for a hike, limiting downside in front-end USD rates. They argue the Dollar could weaken as precautionary positioning is unwound and DXY reconnects with lower Oil prices. ING sees downside risks for the Dollar and a potential test of 101.0 in DXY this week.

Dollar seen pressured after Fed

"Our Fed preview, published last week, argued that precautionary positioning for a potential surprise Fed hike could keep the dollar supported going into today’s FOMC announcement. That appears to have been the case. Despite softer consumer confidence data and de-escalation headlines weighing on the dollar yesterday, DXY has shown little sensitivity to the recent decline in oil prices."

"But that resilience will be tested heavily today. Markets are pricing in 7bp, or about a 25-30% probability of a Fed hike today. That, in theory, implies a mechanical correction lower in front-end USD rates if – like we expect – rates are kept unchanged."

"It seems to us that consensus expects two dissenters – Logan and Hammack – to vote for a hike. In that case, year-end rate expectations (41bp) may remain broadly supported, but we would still see downside risks for the dollar."

"A Fed hold should trigger an unwinding of precautionary USD positioning, allowing the dollar to reconnect with the signal from lower oil prices. The resumption of military strikes in the Gulf overnight does not seem to be severely denting markets’ hopes for de-escalation, with Brent remaining below US$90 a barrel for the moment."

"In other words, unless Fed Chair Kevin Warsh surprises with a hawkish spin, or we see more than two dissenters, we think the dollar will come under pressure today. If constructive headlines from the Gulf return, we expect a test of 101.0 in DXY by the end of this week."

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