In the view of economists at Westpac, Fed’s taper signal and inching forward of rate lift-off plans should underpin the US Dollar Index (DXY) near-term. Risks are building for a breakout to new 2021 highs toward 94.00.
Fed strides toward tapering and rate lift-off
“The FOMC delivered on expectations for a tapering signal, but the main takeaway is the ongoing evolution in the Fed’s thinking on the path of rate hikes. Another two officials joined the seven already pencilling in lift-off for 2022, leaving the Fed evenly divided on the prospect of starting rate hikes next year. The median dot for 2023 rose by another 25bp too, signalling three hikes for that year.”
“Short end rate support for the USD should continue to build through 2022, though DXY is admittedly already slightly expensive vs yield spreads.”
“DXY likely continues to hold 92.0-94.0, though risks of a topside break are building.”