USD: Even dovish Fed members less dovish than the market – MUFG

Lee Hardman, Currency Analyst at MUFG, suggests that the sharp adjustment lower in market expectations for further Fed tightening in the coming years has been one of the key reasons why the US dollar has weakened early this year.

Key Quotes

“The market is now not fully convinced the Fed will hike rates again this year. The market’s current outlook for Fed policy is even making well known dovish members of the Fed sound less dovish. It was evident again yesterday when Boston Fed President Rosengren stated that current market expectations could prove too pessimistic.

He described market pricing as “surprising” because the outlook is not as weak, and the tail risks not as elevated as would be implied by this very gradual path. Chicago Fed President Evans who is also characterised as dove has reiterated as well that he expects two rate hikes this year.

Yet it looks like the market will take more convincing following the recent dovish policy shift from the Fed has reinforced investor scepticism that the Fed will follow through with action. As a result, it still leaves the US dollar vulnerable to the downside in the near-term.”