TD Securities Sees 25bp Hike from FOMC, USD to Show Knee-Jerk Weakness

TD Securities' macro team expects the Federal Open Market Committee (FOMC) to deliver a 25 basis point hike at its September meeting, with the dot plot signaling fewer hikes than markets imply.

The team believes that August's inflation data showed a lack of progress, and Chair Jerome Powell will likely explain this while stopping short of any forward guidance. However, changes to the Summary of Economic Projections (SEP) by the rest of the Committee are expected to be hawkish, showing dots signaling hikes along with upgraded inflation and labor market projections.

Under their base case scenario, a 25bp rate hike is almost fully priced-in, which could result in knee-jerk weakness for the US Dollar. A dovish hold could push the USD back to pre-August CPI levels, while a more hawkish dot plot could extend the recent USD rally.