US Dollar Outlook Hinges on Fed’s Next Steps. Will the FOMC Hike or Pause?

US DOLLAR FORECAST:

• U.S. greenback retreats on the week as Treasury yields plunge on banking sector turmoil
• The FOMC’s financial coverage assembly will steal the limelight subsequent week
• The Fed is anticipated to lift charges by 25 foundation factors, however a pause shouldn’t be completely dominated out in case of additional stress in monetary markets in the coming days

Most Read: Gold Prices Jump as Yields Slump, Sentiment Dismal as Bank Angst Lingers

The U.S. greenback, as measured by the DXY index, got here beneath strain this week, sliding about 0.8% to settle barely beneath the 104.00 stage, undermined by the steep drop in U.S. bond yields, as merchants repriced decrease the Federal Reserve’s tightening path in the face of large banking sector turmoil.

Bets about the outlook for financial coverage shifted in a dovish path after the collapse of two mid-size U.S. regional banks fanned fears of a monetary Armageddon, prompting the Fed to launch emergency measures to shore up depository establishments dealing with liquidity constraints.

The chart beneath shows how a lot Treasury yields and Fed terminal fee expectations have fallen since the center of final week regardless of Jerome Powell’s hawkish message to Congress. It additionally exhibits how the greenback has retreated in parallel with these property.

2023 FED FUNDS FUTURES IMPLIED YIELD

Source: TradingView

Taking into account current developments, the path of least resistance is prone to be decrease for the U.S. greenback, supplied the present scenario doesn’t spiral uncontrolled and results in a big monetary disaster, as that might stand to learn defensive currencies.

Traders might be outfitted with extra info to raised assess the dollar’s prospects after the Fed proclaims its March coverage resolution this coming Wednesday. While expectations have been in flux, market pricing now leans towards a quarter-point rate of interest hike – a transfer that might take borrowing prices to 4.75%-5.00%, the highest stage since 2007.

Anyway, a “pause” continues to be in play and shouldn’t be utterly dominated out, as lots might occur between now and Wednesday. Events in the previous couple of days have proven that unhealthy information comes unannounced and out of nowhere. That mentioned, any renewed monetary stress might nudge policymakers to err on the aspect of warning and undertake a “wait and see” strategy.

Whatever the Fed decides subsequent week, the stars have aligned for steering to be dovish. The FOMC is prone to emphasize the significance of preserving monetary stability and its readiness to behave to stop systemic dangers from materializing. The implications of this message might result in additional U.S. greenback weak point.

Written by Diego Colman, Contributing Strategist