US Dollar: Hawkish Fed may offer only limited gains - BBH

Brown Brothers Harriman’s Elias Haddad anticipates the Federal Open Market Committee (FOMC) will raise rates by 25 basis points to a range of 3.75%-4.00% in their upcoming meeting, the first increase since July 2023. This move is driven by inflation remaining higher than the target and a robust labor market. Financial markets are already pricing in further tightening, with the focus shifting to the committee split, the updated Summary of Economic Projections, and Chair Kevin Warsh’s press conference commentary. Futures markets project a 90% chance of a rate hike this week.

The potential outcomes have contrasting effects on the US Dollar. A hawkish outcome, characterized by a unanimous or near-unanimous vote for the rate increase, alignment with market expectations, or Warsh signaling more tightening, could bolster the USD. Conversely, a dovish scenario, marked by a split vote for the hike, projections below market pricing, or Warsh presenting the hike as temporary inflation mitigation, might weaken the USD.

Haddad argues that the US economy does not necessitate aggressive tightening. Wage growth deceleration is inflationary, and the Fed’s policy is already quite restrictive given a nominal neutral rate around 3.00%. Currently, the AUD/USD pair hovers near a one-and-a-half-week low around 0.7140, while USD/JPY is gaining some traction approaching the 154.00 level.

Meanwhile, gold gains momentum and approaches the $4,300 mark, pressured by a strengthening USD and elevated US Treasury yields. Bitcoin and Ethereum also experience slight upward trends.