Fed’s updated guidance should continue to support a strong US dollar – MUFG

The US dollar’s bullish momentum has been reinforced by the release of the much stronger than expected US CPI report on Friday. As economists at MUFG Bank note, USD strength is reinforced by expectations for an even more active Federal Reserve.

Another upside CPI surprise increases pressure on Fed 

“The release of the much stronger US CPI report for May will increase pressure on the Fed to deliver a hawkish policy update this week. The report revealed that inflation pressures continued to remain uncomfortably high.”

“We expect the Fed to respond in the week ahead by sending a stronger signal that it will raise rates into restrictive territory to dampen upside inflation risks and slow the economy.” 

“The Fed’s updated dot plots are likely to be raised significantly from in March when the median projection for Fed funds rate at the end of this year was set at 1.9% and for the end of next year at 2.8%.”

“We do not expect the Fed’s updated projections to go quite as far as current market pricing but will clearly be in a much more hawkish direction.”