Dollar Firmness Ahead of FOMC Meeting Reflects Tightening Expectations
As the Federal Open Market Committee (FOMC) meeting approaches on Wednesday, the US Dollar Index (DXY) is firming up. According to Scotiabank strategists Shaun Osborne and Eric Theoret, swaps now price an 85% chance of tightening on Wednesday.
This increased probability of a rate hike has led to dollar gains in response to swaps pricing, which has been a near-perfect indicator of Fed policy moves in recent years. However, the strategists note that there are still some risks around the outlook, and a 'dovish' hike that does not commit to additional moves would likely weigh on the USD.
The DXY is currently fairly valued versus front-end spreads, but further gains above 100 would require a significant move in yield differentials. The Fed's willingness to lift rates to this extent is not clear at this point, and Osborne and Theoret doubt it will happen.