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Fed set to hike rates by 25bp as banking crisis calms

The dollar traded mixed against it peers in a narrow range yesterday and ahead of the pivotal FOMC rate decision later today.

Investors have appeared a little more confident after the sharp selloff in risky assets early on Monday morning.

Since the collapse and subsequent rescue of Credit Suisse by its arch rival UBS, itself bailed out in the GFC in 2008, measures of volatility like the VIX have calmed down. Wall Street’s fear gauge had spiked higher above 30 last week, but it now back down much closer to its long-term average around 20.

The flight to safety that we saw during the height of the banking stress recently has also halted. Well-known safe haven currencies like the yen and the dollar too, when times are really bad, have given up recent gains.

The broad outlook for the greenback is a little more challenging with uncertainty surrounding tonight’s Fed meeting.

That gathering concludes this evening with money markets expecting a 25bp rate hike (80% chance), taking the target range to 4.75% - 5%.

Gyrations in that pricing over the past week or so have gone from a nailed on 50bp rate hike to no change at all, but the Fed rarely upsets markets when the chances of a move are above 70%.

Certainly, the hawkish shift in the new dot plot which most officials alluded to a few weeks ago may not emerge.

But focus will be on the 5.1% terminal rate seen at the December FOMC projections and how high this might go.

The Fed will be mindful that financial conditions have tightened markedly recently with credit now much harder to access. Also, the lagged effects of the most aggressive policy tightening in decades could be highlighted in potentially a more neutral stance if the committee do hike rates again.

For the dollar, much will depend on Chair Powell’s tone and any guidance he could give if the FOMC look past the current banking crisis.

Seasonal patterns turn more negative for the buck through the second quarter.

The Dollar index also looks to be rolling over before a possible move lower to the year-to-date lows set in early-February.

If Powell is more focused on inflation concerns and sprinkles the press conference with hawkish rhetoric, then this could underpin support for the USD.

Fed set to hike rates by 25bp as banking crisis calms

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