HSBC's Daragh Maher, a senior forex strategist, suggests a "modest" appreciation for the US dollar in the near term. This outlook is primarily driven by the Federal Reserve's hawkish stance and continued economic resilience in the US. The Fed recently increased interest rates by 25 basis points, lifting the federal funds target range to 3.75-4.00%, marking the first hike since 2023. This move was unanimous, reinforcing confidence in the Committee’s tightening bias, and was followed by Chair Warsh emphasizing that inflation remains too high and the labor market is resilient, signaling a preparedness for further tightening if necessary.
While the Fed's latest "dot plot" projections indicate at least one more rate hike this year and a possibility of another in 2027, this path remains below what the market is currently pricing in. Consequently, HSBC does not foresee a major repricing of rate expectations or the dollar. Instead, the market's focus will likely shift to incoming data to validate the projected rate increase for this year. The US dollar has already strengthened, reaching near a two-month high, following the Fed's decision and strong US business activity data that reignited inflation concerns.
Despite the bullish outlook on the dollar, Maher and HSBC expect the gains to be gradual and data-dependent. This is due to the modest gap between the Fed's projections and market pricing, as well as the fact that other G10 central banks are also adopting more hawkish monetary policies. For instance, the Norwegian central bank raised its policy rate by 25 basis points to 4.50% and indicated potential further hikes. The dollar is also considered less exposed to high energy prices compared to the euro, pound, and yen, which provides additional support.
