It’s the Federal Reserve’s decision day and traders brace for a 75bp rate increase. The market’s key question is whether the Fed is nearing a projected 3.4 percent rate peak around year-end before Fed policy makers can start easing again to tackle the risk of recession. We bear however in mind that the market is often ahead of itself which is why talking about easing monetary policy could be premature at this point.
Nonetheless, the growing risk of a recession may force Fed policy makers to deliver smaller rate increases towards the end of this year. A shift in the Fed’s forward guidance may produce headwinds for the U.S. dollar in the coming months. So, we may see the greenback struggling to hold onto its gains even when the Fed hikes as expected.
In other words, a 75bp rate hike may not be a bullish catalyst for the dollar if additional rate hikes this year are not signaled. And the chance of a 100bp rate hike is at only 13 percent.
Given the summer lull we do not expect market movements to be extraordinarily large.
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