The hawkish FOMC “pivot” throws the US Dollar Index a much needed lifeline. According to economists at Westpac, DXY is unlikely to revisit sub-90 levels anytime soon – scope for 92-93 in the weeks ahead.
The Fed is planning lift-off in 2 years
“The USD is in a much healthier place now the Fed is inching toward the exits. Discussions are actively taking place about talking tapering and a large swathe of the FOMC brought forward the timing of rate hikes, notably, the median dot projects two hikes by end-2023. That brings the Fed closer to market pricing.”
“With the timeline for lifting Fed Funds moving forward and a modest tapering likely to take 12 months or so, the taper timeline has arguably shifted forward too, a start date of late 2021 now looking more likely.”
“A return to sub-90 trade for the DXY seems unlikely near term, if anything there’s scope for multi-day upside toward 92-93 to bring DXY closer into line with yield spreads. But further sustained upside beyond that seems unlikely.”
“Fed tightening expectations likely need to move forward further still, to 2022 (very unlikely at this stage) and the Fed is likely to remain a G10 taper laggard.”