Credit Agricole notes that the Fed is well expected to cut interest rates by 25 bps this week but warns that there may be a hawkish spin to it. On the move, the firm argues that the Fed could place focus on the risk of sticky inflation and still-firm labor market conditions, limiting scope for further near-term cuts.
As such, a more hawkish interpretation could force a reassessment of the recently more dovish Fed expectations and halt convergence of Fed policy with other major central banks. In turn, that should provide some near-term support for the US dollar.
Building on the dollar argument, Credit Argicole says that the greenback has softened in large parts due to fears over its reserve currency status. However, they note that these concerns are now starting to ease and that the dollar should stabilise in the months ahead. And by the time we reach 2026, the firm sees scope for a broad dollar recovery as "rate differentials and fundamentals align".
