Dollar Upside Constrained by Hawkish Guidance and Global Rate Hikes

MUFG's Derek Halpenny notes that the US Dollar has held onto most of its post-FOMC gains after a 25bps hike and hawkish guidance from Fed Chair Warsh. The Fed's projections imply only gradual disinflation and a higher long-run rate, but market pricing had already anticipated more tightening.

Fed Chair Warsh stated that the hike had 'removed a dose of accommodation,' implying that more action will be required to achieve price stability. This was underlined by the fact that the YoY core CPI rate only hits the 2% target in 2029.

Halpenny expects one further Fed hike, with Dollar upside constrained as other G10 central banks also raise rates. The OIS curve ahead of the meeting was priced for more than the two hikes signalled by the 2026 median dot, which should help contain the rates and FX reaction for now.