(Bloomberg) -- The US dollar’s rally is at risk of a reversal if the Federal Reserve sets its interest-rate outlook at a lower level than traders are betting on.
Market-implied expectations for the so-called dot plot jumped this month, with some betting the peak will be around 5%, if not higher. Markets are pricing a peak at 4.5% by March and an end-2023 rate of 4% to 4.25%. In contrast, the most recent forecasts by Fed officials in June are almost all below 4% for 2022-2024.
“A more dovish dot plot may see some scope for USD to sell off,” said Galvin Chia, emerging-market FX strategist at Natwest Markets in Singapore. “Markets will be closely looking to this for guidance.”
The dollar surged this month against its peers in developed and emerging nations as persistently high inflation in the US bolstered bets for more aggressive Fed rate hikes. That’s led to the Japanese yen tumbling to the lowest since 1998 and the pound dropping past $1.14 for the first time since 1985.
Investors will also be on the lookout for the Fed’s growth forecasts as worries over a recession increase, with a big cut to the outlook potentially hurting the greenback.
“The larger reaction may come from a very large downgrade to their US GDP forecast for 2023 to around 0.5%; consensus is 0.9%,” said Joseph Capurso, head of international and sustainable economics at the Commonwealth Bank of Australia in Sydney. That “would signal the Federal Open Market Committee is willing to risk a recession to get inflation down.”