US Dollar Outlook: A Hawkish Fed Pivot – Is The USD Rally Transitory?

A Hawkish Fed Pivot – Is the USD Rally Transitory?

There was a hawkish surprise from the Federal Reserve, with the main takeaway being that the dot plot has shifted towards two rate hikes in 2023 from a previous of zero. Expectations heading into the release had been a 50/50 call that the Fed would shift to only one rate hike in 2023.

Therefore, with the dot plots much more hawkish relative to expectations, USD bears have been squeezed as dollar-funded carry trades unwind. That said, given the size of the moves in short order, the greenback is starting to look overextended.

Was it the Fed or the FT that Marked the USD Bottom

I noted at the start of the month that there had been an increase in “demise of the dollar” reporting and coincidentally, that has marked the low point in the greenback (up 3% since report published).

As I said previously, this can be a common occurrence where an asset performs in the complete opposite direction as to what a magazine cover had signaled. The contrarian view being that once a narrative is displayed on a magazine cover, the narrative is normally well-embedded in the market and has arguably run its course.

US Dollar Chart: Daily Timeframe

US Dollar Outlook: A hawkish Fed Pivot – Is the USD Rally Transitory?

Source: Refinitiv

Looking ahead to next week, I suspect markets will continue to digest the Fed surprise. Upside risks likely to persist for the greenback vs. low yielding currencies (EURCHF). And should equities extend losses in what is typically a seasonally weak time for risk assets, commodity currencies can be expected to weaken further.

US Dollar Chart: Daily Timeframe

US Dollar Outlook: A hawkish Fed Pivot – Is the USD Rally Transitory?

Source: Refinitiv

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