Troubling inflation figures could force Fed policymakers to go off-script and hike the policy rate by 75 bps in June. The dollar’s fate depends on the rate outlook amid growing recession fears.
- Federal Reserve Chair Jerome Powell does not like to surprise the markets. Yesterday, someone at the Fed seems to have given the Wall Street Journal a background interview, the kind where no one is quoted, even anonymously, speculating that Federal Reserve officials are considering a 75 basis point hike on Wednesday.
- The Reuters estimate shows that the US Federal Reserve is expected to hike its policy rate by 50 basis points to the range of 1.25%-1.5% in June. According to the latest market developments, however, such a decision would be seen as a dovish surprise.
- Between a rock and a hard place – stubbornly high inflation requires hitting inflation on its head, and that may trigger further market sell-off and a stronger dollar. Going softer and taking employment into account would result in a loss of credibility, a sell-off in bonds and higher yields. That is also golden for the greenback.
- Aggressive Fed rate hike bets acted as a tailwind for the USD and extended support.
The Federal Reserve is scheduled to announce its monetary policy decision later during the US session and is expected to hike interest rates by 75 bps – the biggest since 1994. Moreover, Fed fund futures indicate rising odds of another jumbo rate hike in July.
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