USD upside risks remain intact ahead of Fed’s meeting – MUFG

A critical event next week will be the FOMC meeting. Analysts at MUFG Bank consider that Jerome Powell will focus on the labour market rather than economic growth. They consider the US dollar could continue with support with “anything less” than a strong commitment to keep financial market conditions accommodative. 

Key Quotes:

“The BoC on Wednesday, the ECB yesterday and next week the Fed, the BoE and the BoJ will all meet and we suspect next week’s messages from central banks will be similar to what we got this week from the BoC and the ECB – that is that there remains a long road to recovery and hence caution over any removal of monetary accommodation is required. But it is the Fed that will perhaps have the most difficult job in communicating that message.”

“But expect to hear much less about GDP from Powell next week and a lot more about COVID-related job losses. 9.21mn jobs need to be refilled to get back to the pre-COVID employment peak in Feb 2020. But not only that, if COVID had never happened by the end of the year, the jobs total by then (157mn) based on a linear trend throughout the post-GFC economic cycle implies job creation of 15.7mn jobs is required. This will be a far more convincing focus for Powell to emphasise the road ahead to full recovery remains very long indeed and therefore continued aggressive stimulus is needed.”

“We will also get an updated Summary of Economic Projections on Wednesday that include macro forecasts and the DOTs profile. The real GDP projection (4.2% in 2021) will be revised considerably higher, the unemployment rate (5.0%) considerably lower but don’t expect too much change on core PCE (1.8%).”

“Might we see a majority of FOMC members signal at least one rate hike in 2023? That’s seems plausible, requiring four FOMC members to shift their view on a first rate hike coming in 2023.”

“Anything less than a strong message of the Fed being very committed to maintaining favourable financial market conditions will likely see USD advance further.”