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The rate decision and the Fed’s comments promise to be the highlight in a week full of releases. The market is in no doubt that the pause in policy tightening is here to stay, with interest rate futures pricing in a near 100% probability of a hike. Comments from Fed officials in recent weeks have removed all intrigue, showing a consensus for keeping policy on hold to gather more data.
Meanwhile, the US economy continues to churn out much stronger-than-expected numbers and gain momentum. Just look at the GDP growth rate of almost 4.9% in the last quarter; before the pandemic, we last saw this in 2014. What a stark contrast to expectations of a recession! These are perfectly reasonable predictions, but they require a sharp cooling soon to materialise. And that requires scaring the markets beyond belief. If Powell can convince the markets at the press conference that he is not bluffing when he threatens another hike, that will be the best news for the dollar.
Therefore, in the event of a real threat of a rate hike, the US dollar rally may get a second wind, and we will see both the initial strong momentum and the subsequent smooth rise on the renewed carry trade.
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