MUFG Research maintains a bullish USD bias in Q1.
'We currently assume the FOMC will raise rates twice this year but after the FOMC minutes last week we have to acknowledge the risks are that the Fed does more. The market now has nearly 4 rate hikes priced for this year, plus QE ending and then possibly starting quantitative tightening before year-end. That equates to a considerable different monetary stance and while this is priced further more through a higher terminal rate in 2023-2024, there is scope for the dollar to strengthen across the board. With annual core CPI set to jump in the coming months, positioning for a more hawkish Fed could have more to run," MUFG notes.
"Hence, we see scope for EUR/USD to fall and possible breach the 1.1000 level and USD/JPY to advance toward the 120.00 level but with the Fed unlikely to deliver what will be priced by mid-2022, we see scope for USD weakness in H2," MUFG dds.