“Although the Fed stepped up rate hikes from 25 basis points (bps) in March to 50 bps in May and 75 bps in June, we forecast three 50 bps hikes in July, September and November, and one final 25 bps hike in December. Our currency forecasts reflect that US bond yields have discounted the Fed Funds Rate rising above its 2.50% neutral rate to 3.50% this year,” write Leow and Tan in a June 27 note.
Markets have become more wary of economic slowdown risks of late, and the foreign exchange markets are playing “a game of two halves”, say DBS Group Research rates strategist Eugene Leow and interest rates strategist Duncan Tan.
The US dollar, for example, will depreciate in 2H2022 after a surge in the former half of the year, say the DBS economists, as the Fed ushers in the fastest pace of rate hikes since the 1990s.
