The US Dollar has surged to its strongest level in more than a year following the Federal Reserve’s hawkish June meeting, but Credit Agricole believes much of the good news is now priced in.
The Dollar has strengthened broadly this month, pushing EUR/USD down to around 1.137 and GBP/USD to near 1.320, as investors increased expectations for further Fed tightening.
According to Credit Agricole, the June FOMC meeting was the key catalyst behind the rally.
“The hawkish outcome of the June Fed policy meeting has been the most important recent event for FX markets.”
The bank says two themes have driven the Dollar higher: markets are pricing in further Fed rate hikes to combat sticky inflation, while investors have unwound hedges against fears of US fiscal dominance.
Despite remaining constructive on the greenback, Credit Agricole warns that expectations may now have become too optimistic.
“We think that the current market Fed rate hike expectations are already looking too aggressive.”
The bank also notes that many of the factors supporting the Dollar have already been reflected in market pricing.
“We conclude that many Fed-related positives are already in the USD price by now.”
Looking ahead, Credit Agricole says the next leg of the Dollar’s move will depend on incoming US data rather than central bank rhetoric alone.
“It would take hawkish Fed speak and positive data surprises to help the USD rally further.”
The bank expects investors to focus on upcoming US non-farm payrolls, ISM surveys and comments from Fed Chair Kevin Warsh at the ECB‘s Sintra conference.
