US Dollar: Fed hike odds and asymmetric risks – DBS

DBS Group Research’s Philip Wee notes that the Dollar is trading on diverging themes versus Developed Market and Asia-ex Japan currencies, with Fed expectations central. Futures are pricing a 38% chance of a surprise rate hike at Fed Chairman Kevin Warsh’s second FOMC meeting. Wee highlights that USD bulls could be disappointed if the Fed stays on hold and ends forward guidance.

Fed pricing drives Dollar performance

"The FX market ran different themes against Developed Market and Asia-ex Japan currencies overnight, balancing monetary policy in the former and oil price relief in the latter."

"The futures market is not ruling out a surprise hike at Fed Chairman Kevin Warsh’s second FOMC meeting, which it has priced in at a 38% probability."

"The DXY basket of currencies will likely depreciate if and only if this happens."

"All said, Warsh could disappoint USD bulls as well by seeking cover to deliver nothing amid the latest retreat in oil prices and by aiming to end forward guidance to keep rates on hold without signalling a September hike."