USD to strengthen gradually this year as the Fed moves towards policy normalisation – HSBC

The FOMC largely delivered on expectations, leaving its policy rate steady, but signalling a likely rate hike in March. Federal Reserve (Fed) Chair Jerome Powell’s hawkish comments and the Fed’s policy normalisation pivot should support the USD, in the view of economists at HSBC.

Fed Chair Powell made some hawkish comments, probably supporting the USD

“Powell suggested that rates could be raised faster than in the prior tightening cycle, with every meeting potentially live. He did not rule out the possibility of a potential 50bp hike at some stage in the cycle. The Fed Chair also leaned a bit more heavily on the upside risks to inflation and suggested further upward revisions to Fed inflation forecasts were likely to come in the March projections.”

“Fed Chair Powell also reiterated that balance sheet reduction would likely occur faster than during the last tightening cycle.” 

“We have been looking for a continuation of USD strength as the Fed moves towards policy normalisation, and this January meeting should provide a bit more impetus on that front.”