TD Securities Adjusts Fed Rate Hike Timeline Limits USD Upside

TD Securities highlights the resilience of the US economy and labor market but notes that it is not overheating. This assessment has led them to adjust their Fed rate hike expectations, now anticipating increases in December 2026 and March 2027. They believe the market has already priced in the peak of Fed hawkishness, making it difficult to sustain a persistently bullish outlook for the US dollar solely based on Fed policy and economic data.

The firm suggests that recent US data indicates the Fed cannot accelerate rate hikes beyond a quarterly pace, which limits the potential for additional USD strength through tighter monetary policy. Despite this, the USD remains the highest-ranked currency on their scorecard due to favorable rate differentials, resilient growth, and strong equity performance.

TD Securities points out that long dollar positioning has been profitable, with market participants also holding long dollar positions. This leaves short positions in low-yielding G10 currencies, particularly the Swedish krona, Canadian dollar, and New Zealand dollar, appearing crowded.