Danske Research discusses its expectations for tomorrow's FOMC policy meeting.
"Tomorrow focus turns to the FOMC meeting, where the policy stance may be changing. We expect the dots to start reflecting expectations to a rate hike in 2023 and Powell may acknowledge they have started to think about thinking about tapering. Such slightly hawkish tones from Fed are reminiscent of Q1, and it can move EUR/USD below 1.20 over the coming months.. During Q1, the Fed was split between hawkish and dovish voices but this contributed well to limit the tail risk of outsized inflation prints becoming entrenched in markets. In turn, EUR/USD moved from 1.22 to 1.17," Danske notes.
"Powell's alignment of communication contributed equally to weakening the dollar in Q2. As we move in to Q3, we expect to see a shift, which is reminiscent of Q1. At the current point in time where momentum in equities is shifting a bit towards tech and inflation is well priced, one could see a more hawkish Fed as a catalyst for some dollar strength over the coming months," Danske adds.