US Dollar: Fed pricing creates asymmetric risks – BBH

FXStreet Insights Team FXStreet

Brown Brothers Harriman’s (BBH) Elias Haddad says the US Dollar (USD) remains supported by energy-driven risk aversion ahead of the FOMC decision. With markets already pricing substantial Fed tightening, he sees asymmetric risks for USD, with limited upside from a hawkish outcome but greater downside from a dovish surprise. Haddad adds that current US economic conditions do not warrant an aggressive tightening cycle.

Fed path shapes Dollar outlook

"USD is holding on to this week’s gains, triggered by energy-shock risk aversion. The slump in bonds and stocks stabilized as the overshoot in crude oil prices stalled. Worrisomely, Iran has every incentive to keep the heat on ahead of the November 3 midterms and hurt Republicans."

"For now, all eyes are on today’s FOMC decision (7:00pm London, 2:00pm New York). The FOMC is poised to deliver a 25bps hike to a target range of 3.75%-4.00% after five straight holds, marking its first hike since July 2023. Persistently above target US inflation and a stable labor market justify a rate increase."

"Fed funds futures price in 94% odds of a hike today. As such, the vote split, updated Summary of Economic Projections, and Fed Chair Kevin Warsh’s press conference will guide the market reaction."

"The swaps curve already implies almost 100bps of tightening over the next twelve months: 25bps today, another 25bps hike by year-end, and nearly 50bps by September 2027. This creates an asymmetric risk for USD with limited gains from a hawkish outcome, but greater downside from a dovish surprise."

"In our view, the US economy does not warrant an aggressive tightening cycle. The slowdown in wage growth is disinflationary, and Fed policy is already somewhat restrictive against a nominal neutral rate of around 3.00%."

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

Author

FXStreet Insights Team

FXStreet

The FXStreet Insights Team is a group of journalists that handpicks selected market observations published by renowned experts. The content includes notes by commercial as well as additional insights by internal and external analysts.

AUD/USD hangs close to monthly lows, still defends 0.7100 ahead of Fed decision

AUD/USD retains its negative bias for the third straight day, defending 0.7100 while trading close to a monthly low in Wednesday's Asian session on Wednesday. The US Dollar stands firm near a two-week high as the anticipated Fed rate hike and oil-driven inflation fears continue to push US bond yields to a multi-year high. Furthermore, escalating Middle East tensions benefit the safe-haven buck and weigh on the risk-sensitive Aussie.

USD/JPY holds firm above 155.00, awaits Fed policy announcements

USD/JPY climbs to a fresh one-week high above 155.00 in the Asian session on Wednesday amid a bullish US Dollar. Oil-driven inflation fears, along with the anticipated Fed rate hike, continue to support surging US bond yields. Moreover, rising US-Iran tensions underpin the USD's reserve currency status. The pair, however, remains below the mid-155.00s as bulls seem hesitant ahead of the Fed decision later today and the BoJ meeting, starting on Thursday.

Gold bounces to $4,350; focus on the Fed

Gold sets aside two daily declines in a row, gathering some composure and revisiting the $4,350 zone per troy ounce amid decent gains midweek. The precious metal’s recovery comes despite an acceptable advance in the US Dollar and declining US Treasuty yields prior to the anticipated rate hike by the Fed.

XRP Price Forecast: XRP clings to 50-day EMA support after CLARITY Act setback

Ripple (XRP) trades lower around $1.28 on Wednesday, as investors broadly assess the impact of the failed United States (US) Senate vote on the CLARITY Act and the upcoming Federal Reserve (Fed) monetary decision. The remittance token has trimmed early-week gains that tagged highs around $1.50 on Monday and now holds key moving-average support.

Federal Reserve set to raise interest rate after five meetings on hold

The United States (US) Federal Reserve (Fed) announces its interest rate decision on Wednesday, following another pivotal meeting that could provide key insights into the monetary policy outlook heading into the end of the year.

How Japan became the World's Banker and why that era may be ending

Japan's ultra-low interest rates helped finance trillions of dollars in global investments for more than a decade, making the Japanese Yen one of the world’s cheapest sources of funding. With the Bank of Japan expected to tighten policy again this week, that advantage may be entering a new phase. While most major economies raised interest rates, Japan remained the world's outlier.