USD to extend its bearish trend unless Fed delivers hawkish surprise – MUFG

The US dollar has continued to correct lower this month with the DXY extending its decline to almost 3% from the intra-day high at the end of last month. It has helped to lift EUR/USD back above the 1.2100-level. Will Fed policy update derail the bearish USD trend? According to economists at MUFG Bank, if Powell’s FOMC press conference passes without any surprise change in the cautious communication approach, the USD negative momentum looks set to continue for now. 

USD bearish trend extends heading into FOMC meeting 

“The main event risk for the US dollar in the week ahead which could potentially challenge the bearish trend currently in place is the latest FOMC meeting on Wednesday. The Fed is expected to acknowledge building evidence of a robust economic recovery at the start of this year. The better than expected economic data flow has lifted the consensus forecast for GDP growth in Q1 to almost 7% annualized. However, it remains too early for Chair Powell to change his dovish stance.” 

“By the summer the Fed will likely have enough evidence of a robust recovery to suggest that tapering could be on the horizon.” 

“The latest Bloomberg survey has revealed that about 45% of US economists now expect the Fed to begin tapering QE in Q4. However, the Fed is then expected to wait until 2023 to begin raising rates with the median forecasts set at 0.75% by the end of 2023 and 1.25% by the end of 2024.” 

“For the US dollar to derive more support in the week ahead, the Fed would have to tweak the ‘some time’ guidance to bring forward QE tapering expectations further. Without a hawkish surprise, the US dollar should continue to trade on the back foot for now.”