US Dollar: FOMC scenarios guide Dollar reaction – TD Securities

TD Securities’ macro team, including Oscar Munoz and colleagues, expects the FOMC to deliver a 25bps hike, with the dot plot signaling fewer hikes than markets imply. They see the Dollar showing knee-jerk weakness under this base case, but note that a dovish hold could push USD back to pre-August CPI levels, while a more hawkish dot plot could extend the recent USD rally.

Dollar paths under FOMC outcomes

"We expect the FOMC to begin a hiking cycle at its September meeting with a 25bps rate increase. August inflation data showed a lack of progress, and Chair Warsh will likely explain as much while stopping short of any forward guidance. However, changes to the SEP by the rest of the Committee will likely be hawkish — showing dots signaling hikes along with upgraded inflation and labor market projections."

"With a 25bp rate hike almost fully priced-in, the USD could see knee-jerk weakness under our base case. A rate hold would be a big dovish surprise and could push the USD back to pre-August CPI release level. The USD rally could have room to extend if the dot plot puts an October rate hike on the table."

"We expect a 25bps hike, but the dot plot may show a lower number of hikes than markets anticipate. The curve could bull steepen modestly on our base case given recent hike repricing, and USD could see some knee-jerk weakness."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)