United States Dollar: Fed patience tempers downside – OCBC

OCBC’s Sim Moh Siong notes FX markets are in a holding pattern as traders await the FOMC, with Oil’s decline easing inflation pressures but seen as having limited further downside. The Fed is expected to keep rates unchanged and drop its easing bias, while the Dollar lacks a clear bearish catalyst, leading OCBC to stay neutral and favour FX cross trades.

Fed hold keeps Dollar directionless

"Waiting on the Fed: FX is in a holding pattern ahead of the FOMC. This persists even as oil continues to drift lower before the expected Friday signing of the US-Iran memorandum. Brent has slipped below USD80/bbl, undercutting many analysts’ year-end forecasts."

"Further downside in oil may be capped. Even if the Strait of Hormuz reopens, normalisation will take time. Mine clearance, insurance reinstatement, restarting shut-in production and precautionary stockpiling should slow the pace of any further decline."

"The Fed is set to keep rates unchanged for a fourth meeting. We expect the FOMC to drop its easing bias with unanimous support. Chair Warsh will likely acknowledge sticky inflation and a firmer labour market but avoid signalling a clear policy tilt."

"With oil prices easing, the Fed can afford to stay patient if the trend holds."

"The case for sustained USD weakness remains weak. We stay neutral on the dollar and prefer relative value in FX crosses."

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