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

US DOLLAR FORECAST:

• U.S. greenback retreats on the week as Treasury yields plunge on banking sector turmoil
• The FOMC’s financial coverage assembly will steal the limelight subsequent week
• The Fed is anticipated to boost 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 Read: Gold Prices Jump as Yields Slump, Sentiment Dismal as Bank Angst Lingers

The U.S. greenback, as measured by the DXY index, got here below stress this week, sliding about 0.8% to settle barely beneath the 104.00 degree, 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 concerning the outlook for financial coverage shifted in a dovish route 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 beneath shows how a lot Treasury yields and Fed terminal charge expectations have fallen because the center of final week regardless of Jerome Powell’s hawkish message to Congress. It additionally reveals how the greenback has retreated in parallel with these property.

2023 FED FUNDS FUTURES IMPLIED YIELD

Source: TradingView

Taking into consideration latest developments, the path of least resistance is more likely to be decrease for the U.S. greenback, offered the present scenario doesn’t spiral uncontrolled and results in a big monetary disaster, as that might stand to profit defensive currencies.

Traders can be outfitted with extra data to higher assess the dollar’s prospects after the Fed declares its March coverage determination this coming Wednesday. While expectations have been in flux, market pricing now leans towards a quarter-point rate of interest hike – a transfer that might take borrowing prices to 4.75%-5.00%, the best degree since 2007.

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

Whatever 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 might result in additional U.S. greenback weak spot.

Written by Diego Colman, Contributing Strategist