US Dollar Outlook Hinges on Fed’s Next Steps. Will the FOMC Hike or Pause?

US DOLLAR FORECAST:

U.S. greenback retreats on the week as Treasury yields plunge on banking sector turmoilThe FOMC’s financial coverage assembly will steal the limelight subsequent weekThe Fed is predicted to lift charges by 25 foundation factors, however a pause shouldn’t be solely dominated out in case of additional stress in monetary markets within the coming days

Most Learn: Gold Costs Leap as Yields Droop, Sentiment Dismal as Financial institution Angst Lingers

The U.S. greenback, as measured by the DXY index, got here beneath stress this week, sliding about 0.8% to settle barely under the 104.00 stage, undermined by the steep drop in U.S. bond yields, as merchants repriced decrease the Federal Reserve’s tightening path within the face of great banking sector turmoil.

Bets in regards to the outlook for financial coverage shifted in a dovish course after the collapse of two mid-size U.S. regional banks fanned fears of a monetary Armageddon, prompting the Fed to launch emergency measures to shore up depository establishments dealing with liquidity constraints.

The chart under shows how a lot Treasury yields and Fed terminal fee expectations have fallen because the center of final week regardless of Jerome Powell’s hawkish message to Congress. It additionally exhibits how the greenback has retreated in parallel with these belongings.

2023 FED FUNDS FUTURES IMPLIED YIELD

Supply: TradingView

Bearing in mind current developments, the path of least resistance is more likely to be decrease for the U.S. greenback, offered the present state of affairs doesn’t spiral uncontrolled and results in a big monetary disaster, as that may stand to profit defensive currencies.

Merchants can be geared up with extra info to raised assess the buck’s prospects after the Fed broadcasts its March coverage determination this coming Wednesday. Whereas expectations have been in flux, market pricing now leans towards a quarter-point rate of interest hike – a transfer that may take borrowing prices to 4.75%-5.00%, the best stage since 2007.

Anyway, a “pause” continues to be in play and shouldn’t be fully dominated out, as so much may occur between now and Wednesday. Occasions in the previous couple of days have proven that unhealthy information comes unannounced and out of nowhere. That stated, any renewed monetary stress may nudge policymakers to err on the aspect of warning and undertake a “wait and see” method.

Regardless of the Fed decides subsequent week, the celebs have aligned for steering to be dovish. The FOMC is more likely to emphasize the significance of preserving monetary stability and its readiness to behave to forestall systemic dangers from materializing. The implications of this message may result in additional U.S. greenback weak spot.

Written by Diego Colman, Contributing Strategist