MUFG Research discusses the USD outlook around this week's FOMC policy meeting.
"The scaling back of Fed rate hike expectations ahead of this week’s policy meeting has been driven by two main factors. Firstly, Fed speakers including Governor Waller have signalled that another 75bps hike remains the most likely scenario rather than stepping up the pace of hikes further. A 75bp hike would still bring the policy rate more closely in line with Fed’s estimate for the neutral policy rate (median estimate at 2.40%). Secondly, the US economic data flow has helped to ease some concerns over an un-anchoring of inflation expectations (University of Michigan survey for July) and signalled an increasing risk of a sharper slowdown in growth (Philly Fed & US PMI surveys for July)," MUFG notes.
"We expect the Fed to continue to deliver a hawkish policy message this week and keep alive expectations for another 75bps hike (+58bps currently priced in) in September," MUFG adds.
Meanwhile, Bank of America now says a 100 bps hike is unlikely.
"At the July Federal Open Market Committee (FOMC) meeting, we expect the Fed to raise the target range for the Federal funds rate by another 75bp to 2.25-2.50%, up from 1.50-1.75% currently. Following the June Consumer Price Index (CPI) report, speculation had risen that the Fed might lean toward a Bank-of-Canada-sized 100bp rate hike, but a number of FOMC participants took to the airwaves and suggested a 75bp rate hike remained the prudent course of action. The Fed would have signaled if it wanted to hike 100bp," BofA notes.
"On the balance sheet, we expect no change in policy. The FOMC should continue to reduce its securities holdings, which include monthly caps of $30.0bn and $17.5bn per month," BofA adds.
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