USD has struggled to perform of late despite the nascent build-up in Fed rate-hike expectations. Indeed, while investors have been putting rate hike bets back on the table, the market is still quite cautious, attaching only about a 80% chance of one hike before yearend (using OIS).
We suspect the upcoming March Fed meeting could encourage further front loading of rate expectations. In particular, we think that the recent improvement in US data (US ESI moved up) and easier US financial conditions (US FCI moved down) should allow Chair Janet Yellen to maintain a fairly constructive view on the US economy and keep the prospects for further hikes in place.
While we expect the Fed to lower its median rate projections to reflect the recent deterioration in the global economic conditions, they should do so by less than expected by the markets.
A relatively more hawkish dot plot and Yellen’s constructive assessment should signal Fed’s confidence in the US recovery but could also point at tighter financial conditions ahead. Risk-correlated and commodity currencies could lose ground again against USD as a result.
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