We expect the Federal Open Market Committee (FOMC) meeting this week will be hawkish, despite the risks to the outlook from Russia’s invasion of Ukraine. The Federal Reserve’s stance is thus likely to strengthen the USD and push US yields higher. We see the greenback as high as 1.05 against the EUR this year and 10Y Treasury yields to reach 2.35% over the next 12 months.
Source: Bank of Singapore, Bloomberg.
The Fed is set to be hawkish as US inflation - even when excluding higher food and energy prices caused by the war in Europe - is already above 5.0% now as the first chart shows. Core inflation has reached 40-year highs due to the strength of America’s recovery from the pandemic. This has led to the US economy returning quickly to full employment as the second chart shows.
Source: Bank of Singapore, Bloomberg.
Thus, faced with troubling inflation, low unemployment, surging energy prices and rising inflation expectations, we expect the Fed will tighten monetary policy steadily through five rate hikes in 2022 despite the uncertainty caused by the war. This week we think the FOMC will:
We expect the Fed’s hawkish stance will thus support the USD - as the European Central Bank and Bank of Japan still remain unlikely to start interest rate hikes for several quarters and the People’s Bank of China is more likely to cut this year - while also pushing Treasury yields higher.
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