USD: Guided by the Fed rate hike expectations – HSBC

According to analysts at HSBC, with the US Fed looking all set to increase its policy rate once before year-end 2018, and another three times in 2019, the USD might be under some serious pressure in case of fewer than expected hikes – or no hikes at all.

Key Quotes

“The big question for the FX markets should not be whether the Fed will pause or slow down. It is what is causing the Fed to slow down or take a pause on its hike profile that is more important for the USD.”

“In our view, there are two likely reasons for the Fed to shift its hike profile towards what the market is currently pricing.

The first scenario: If the US economy starts to slow down independently compared to the rest of the world, we think it would be logical for the FX markets to sell the USD and look to other currencies. In this scenario, when the Fed is not increasing interest rates and the economy slows down, that may put some pressure on the USD.

The second scenario: The Fed may take a pause on its hike profile if global growth starts to slow down also impacting the US economic outlook. The rest of the world might be slowing even more sharply than the US. In this scenario it would seem odd to sell the USD and to buy currencies in other economies when growth was coming under even more pressure. As such the USD could still perform well even if the Fed were to slow or stop its hiking cycle.”

“When we think about the balance of these different scenarios and where the Fed is likely to go in 2019, the USD still looks attractive, in our view.”