That seems to be the consensus going into today's key risk event
A look at some of the recent takes on the greenback ahead of the FOMC meeting:
- The event is the release valve
- This week should reinforce a tactical bullish setup for USD - TD
- MUFG trade of the week: Sell EUR/USD
- 3 reasons why the Fed is likely interpreted as hawkish - BofA
I'd argue that there isn't going to be a straightforward reaction in all of this as the market has already began to price in a rate hike in June next year. In other words, market participants will perhaps be hoping for a something a little more hawkish by the Fed.
But to some extent, one should expect Powell to play down any immediate rate hike prospects as the Fed should reaffirm that the current focus is just only on tapering - affording them some flexibility going into next year to deal with surging inflation pressures.
I doubt the Fed will go above and beyond in clarifying that as they should reiterate that the factors driving inflation at the moment are largely 'transitory'.
In essence, they will make clear that tapering and rate hikes are not coincidental.
If anything else, I can foresee the yield curve continuing to flatten in the aftermath as a policy accident (either which way) may be part of what the market is looking for.
That may benefit the dollar if we also see risk sentiment pull back especially since US stocks are at lofty levels. However, even a more dovish Fed is unlikely to see dollar losses be sustained for too long my view. Year-end demand is also something to consider that could bolster dollar sentiment over the next few weeks.
In short, there are more upside risks to the dollar than there is downside risks as it would take a lot to convince the market that the Fed isn't teeing up rate hikes - as much as they're not admitting to it yet. That compares with other major central banks, which mostly are still lagging behind (besides the BOC, RBNZ, and BOE perhaps).
