USD: when a pivot is not a pivot

Ahead of its November policy meeting, our economist and the market consensus
expect the Fed to hike rates by 75bp and to reiterate its plans to make monetary
policy even more restrictive. Of greater importance for the markets would be any
indications from Fed Chair Jerome Powell today that the pace of tightening would
moderate in the coming months. If confirmed, such a signal could be seen as a
‘dovish pivot’ according to some clients and thus give risk sentiment a boost. We
tend to only partially agree with that assessment, however. Less aggressive Fed
hikes and thus less aggressive tightening of the US and global financial conditions
could indeed help ease the worst of the market growth concerns. At the same time,
however, with the US inflation still very ‘sticky’, the Fed should continue to push
rates towards its terminal rate, in a boost to USD’s rate advantage. Moreover, Fed
Chair Powell could hint at an even higher terminal rate than the c.4.95% priced in
by the US rates markets at the time of writing if US inflation proves more persistent.
In all, we think that the Fed could offer some support to risky assets but also keep
the USD’s rate appeal firmly in place. This could mean that demand for USD carry
trades could continue to support the currency vs low-yielders like the JPY, the CHF
and even the EUR. Moreover, we cannot rule out the possibility that the Fed
surprises on the hawkish side by signalling that further outsized rate hikes could
be on the table in December and beyond. Under this scenario we see the highyielding,
safe-haven USD supported more broadly.

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