TD Securities delays Fed rate hikes to 2026-27 amid cautious USD outlook

TD Securities has adjusted its outlook for Federal Reserve rate hikes, now expecting the first increase in December 2026, followed by another in March 2027. The firm cites the US economy's resilience without overheating as the key factor behind this delayed timeline. It also notes that market pricing for Fed hawkishness has likely peaked, suggesting limited room for further bullish signals for the US dollar (USD) from data and policy alone.

The firm anticipates the Fed will raise rates at a quarterly pace, with recent US data indicating that faster hikes would not provide additional support for the USD. Despite this, TD Securities ranks the USD highest due to favorable rate differentials, strong growth, and robust equity performance. It also highlights that long-dollar positioning in the market has become crowded, particularly against low-yielding G10 currencies like the Swedish krona (SEK), Canadian dollar (CAD), and New Zealand dollar (NZD).

TD Securities advises cautious trading of the USD in the coming weeks, as its upward momentum is likely reaching its limit. The firm suggests that derivative traders could exploit this capped upside by writing call options on the US Dollar Index (DXY) near major resistance levels. It also recommends exploiting crowded short positions in G10 currencies through tactical long positions to capture potential reversals.

Overall, the firm expects the Fed's slower adjustment pace to compress currency volatility significantly. It advises traders to focus on range-bound strategies and relative value plays rather than chasing broad dollar strength.