USD: 3 reasons why this episode of peak Fed rates may be different - Credit Agricole

Credit Agricole CIB Research argues that this episode of Fed peak rates may actually result in USD strength.

"This week, the FOMC should draw the curtain on its tightening cycle after hiking one last time. While a peak Fed has historically heralded the start of periods of sustained USD underperformance, we think that the current episode may be different for several reasons:(1) the Fed should keep its rates stable as it tries to bring inflation Inflation Inflation is defined as a quantitative measure of the rate in which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general level of prices where a given currency effectively buys less than it did in prior periods.In terms of assessing the strength or currencies, and by extension foreign exchange, inflation or measures of it are extremely influential. Inflation stems from the overall creation of money. This money is m Inflation is defined as a quantitative measure of the rate in which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general level of prices where a given currency effectively buys less than it did in prior periods.In terms of assessing the strength or currencies, and by extension foreign exchange, inflation or measures of it are extremely influential. Inflation stems from the overall creation of money. This money is m Read this Term under control and thus defy market expectations of rate cuts in H223;" CACIB notes.

"(2) a less-dovish-than-expected Fed pivot, coupled with weakening US data, bank sector worries and debt-ceiling angst could fuel risk aversion Risk Aversion Risk aversion is a term used by investors in financial markets, describing the behavior by traders to avoid exposure to uncertainty or risk. The term contrasts with risk appetite, which reflects a trader's desire to increase their exposure to uncertainty or risk. Risk aversion is a common trait of investors, who seek to hesitate towards investments with an unknown payoff or outcome. These traders will opt for safer forms of investments that are either less volatile, have a more predictable outco Risk aversion is a term used by investors in financial markets, describing the behavior by traders to avoid exposure to uncertainty or risk. The term contrasts with risk appetite, which reflects a trader's desire to increase their exposure to uncertainty or risk. Risk aversion is a common trait of investors, who seek to hesitate towards investments with an unknown payoff or outcome. These traders will opt for safer forms of investments that are either less volatile, have a more predictable outco Read this Term; and (3) the USD that currently ‘resides’ at the bottom of the so-called ‘USD smile’ could receive a boost from any paring back of Fed rate cut bets and/or a deterioration of risk sentiment," CACIB adds.

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