MUFG’s Derek Halpenny notes the US Dollar (USD) is under upward pressure ahead of the FOMC, with NZD/USD hit hard after a surprise Reserve Bank of New Zealand (RBNZ) hold. He expects the FOMC to keep rates on hold but maintain a hawkish tone, with December largely priced. Any dovish surprise, including focus on tighter financial conditions, could weaken the Dollar.

FOMC tone and Dollar sensitivity

“The US dollar remains under upward pressure although FX moves are generally well contained – apart from NZD/USD, which is down over 1% following the surprise hold by the RBNZ today.”

“The FOMC is very likely to remain on hold but the OIS indicates close to 10% probability of a hike.”

“If the press conference is similar in tone to previous public engagements by Chair Warsh he is likely to come across as hawkish.”

“Might Warsh give a further nod to tightening financial conditions doing more of the work that could curtail expectations on policy action further out in 2027.”

“A hawkish communication is generally expected so any surprise dovish elements would likely have a bigger impact weakening the dollar than a hawkish message would strengthen the dollar further.”