US Dollar: Fed repricing risk caps downside – Rabobank

Rabobank’s Senior FX Strategist Jane Foley notes the US Dollar (USD) has outperformed G10 peers on expectations the Fed will deliver around 100 bps of tightening over 12 months, but warns this may be excessive. They see scope for USD softness if the Fed underdelivers, yet highlight ongoing support from safe haven flows and US energy exporter status, keeping EUR/USD near 1.16 over 1–3 months.

Fed expectations and safe haven support

"The dollar is the best performing G10 currency on a 5-day view, bolstered by the expectation that the Fed is likely to announce a 25 bps rate hike at today’s policy meeting. Indeed, on a 12 month view the market is priced for almost 100 bps of rate hikes. This suggests that if the Fed doesn’t match the market’s hawkish expectations today, the USD could fall back."

"On balance, it is Rabobank’s house view that the market has priced in too much Fed policy tightening into next year and that the risks are skewed towards today’s FOMC undermining the market’s conviction on rate hikes going forward. While we expect that the USD will struggle in the sessions ahead, we don’t anticipate that the USD will come under heavy pressure and maintain our forecast that EUR/USD is unlikely to stray too far from the 1.16 area on a 1-to-3-month view."

"While a paring back of Fed rate hike hopes would increase the USD’s vulnerability, the greenback is still likely to draw some support from the US’s position as a net energy exporter and from its safe haven status. The latter may have been damaged by concerns over the large budget deficit in the US, but the lack of alternative safe havens means that the USD is likely to continue benefitting from these flows."

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