Asymmetric Risks: US Dollar Faces Hawk-Dovish Dilemma Ahead of FOMC Decision

The US dollar has remained supported by energy-driven risk aversion ahead of the Federal Open Market Committee (FOMC) decision, according to Brown Brothers Harriman's Elias Haddad. The market is pricing in a substantial Fed tightening, which creates asymmetric risks for the USD. With limited upside from a hawkish outcome and greater downside from a dovish surprise, investors are on high alert.

The current US economic conditions do not warrant an aggressive tightening cycle, argues Haddad. He notes that the slowdown in wage growth is disinflationary, and Fed policy is already somewhat restrictive against a nominal neutral rate of around 3.00%. The swaps curve implies almost 100bps of tightening over the next twelve months, which adds to the uncertainty.

The FOMC decision today (7:00pm London, 2:00pm New York) will guide market reaction. With 94% odds of a hike priced in by Fed funds futures, the vote split and updated Summary of Economic Projections will be closely watched.