MUFG’s Lee Hardman notes the US Dollar (USD) has reversed early-week losses and is trading near year-to-date highs ahead of tomorrow’s Federal Open Market Committee (FOMC) meeting. Softer energy prices and a small pullback in US Treasury yields have not prevented markets from positioning for a potentially hawkish Federal Reserve (Fed). Hardman still expects rates to be left on hold, but highlights risks of dissent and unclear forward guidance.

Dollar firms as markets eye Fed

"The US dollar has quickly reversed the losses sustained at the start of this week and is back trading close to year-to-date highs ahead of tomorrow’s FOMC meeting."

"The de-escalation of military tensions in the region has helped at least temporarily to ease upward pressure for energy prices, and central bank rate hike expectations ahead of the latest policy meeting for the Fed, BoE and BoJ this week."

"The two-year US Treasury yield has dropped back by around 7bps from last week’s high, but market participants are still wary over the risk of a hawkish policy update from the Fed this week which is continuing to encourage a stronger US dollar in the near-term."

"We still expect the Fed to leave rates on hold this week which would give them more time to assess how inflation risks evolve over the summer."

"The stronger US dollar in the run up to tomorrow’s meeting indicates that market participants are expecting a hawkish policy update, and is currently poised to extend its advance below important resistance levels provided by year-date-highs."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)