US Dollar: Fed reaction function clouds dollar outlook – MUFG

MUFG’s Derek Halpenny highlights that the Federal Reserve’s decision to leave rates unchanged, and Chair Warsh’s failure to clearly justify the pause, triggered a sell-off at the long end of US Treasuries and modest Dollar weakness. He stresses that Fed credibility is now in question, inflation expectations have jumped, and the US Dollar outlook has deteriorated as curve steepening points to further depreciation risks.

Fed uncertainty weighs on Dollar

"The long-end of the US Treasury bond market sold off last night taking the US dollar weaker as well as Fed Chair Warsh spoke in detail for around 45mins but without providing any clear explanation as to why the FOMC decided to keep the key policy rate unchanged."

"We see three explanations here : 1) This potential more laissez-faire approach from Warsh means a less active Fed that will therefore, increase risks of the Fed ending up behind the curve."

"The 2s10s spread has had its biggest jump since August last year and we would argue the outcome of the Fed meeting is certainly US dollar negative."

"The outlook ahead though is now less clear with greater uncertainty over the reaction function of the Federal Reserve."

"Fed credibility is being questioned today and after a big jump in inflation expectations the US dollar outlook has certainly worsened."

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