US Dollar: Fed communication key for path – OCBC

OCBC’s Sim Moh Siong and Christopher Wong highlight that markets have repriced the risk of a July Fed hike higher after Oil-driven inflation worries, but still expect no move. A hawkish hold would keep the US Dollar (USD) supported by pushing tightening expectations further out, while a poorly explained pause could hurt Fed credibility, lift inflation breakevens and weigh on the Dollar over the coming months.

Hawkish hold would underpin Dollar

"The probability of a July Fed rate hike fell to just 10% following benign US inflation data but has since rebounded to 35% as higher oil prices reignited inflation concerns."

"In short, markets have shifted from viewing a July hike as a remote possibility to a meaningful risk."

"If the Fed remains on hold, as we expect, the market reaction will hinge on its communication."

"A hold accompanied by hawkish guidance would likely push expected rate hikes further out the curve without materially altering the roughly 55bp of cumulative tightening priced in through mid-2027. In this scenario, the USD should remain supported."

"However, a decision to leave rates unchanged with little explanation could be interpreted as dovish and create confusion about the Fed's reaction function. That risks lifting long-end inflation breakevens, a development that would be negative for the USD."

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