Fed: Any USD strength on hawkish rhetoric could reverse quickly – MUFG

The US Dollar has weakened sharply ahead of the FOMC meeting. A hawkish message is unlikely to strengthen the greenback sustainably, in the opinion of economists at MUFG Bank.

Hawkish rhetoric will fall a bit flat 

“The Fed certainly has an incentive to talk hawkishly. The inflation data are clearly good news but market conditions since the last meeting have clearly loosened and the Fed will likely want to curtail that from here.” 

“Since the hawkish FOMC on 2nd November, the S&P 500 is up 4.3%; the 10-year UST bond yield is down over 50 bps and the USD is nearly 7% weaker. Our suspicion at this juncture is that Chair Powell has his work cut out for himself in turning this momentum and any hawkish rhetoric is unlikely to get much traction in the face of yesterday’s weak CPI print.”

“Any US Dollar strength on hawkish rhetoric could reverse quickly.”

See – Fed Preview: Forecasts from 18 major banks, downshift to 50 bps