US Dollar: Why a December rate hike remains possible after the Fed pause – BBH

The US Dollar (USD) continues to draw support from a backdrop of robust US data and mounting inflation pressures that favours further tightening, according to Brown Brothers Harriman’s (BBH) Elias Haddad. He expects the Federal Reserve (Fed) to hold the Fed funds rate at 3.75–4.00% this week, while futures indicate only a slim probability of a change. Firm readings are anticipated for the September Personal Consumption Expenditures (PCE) Price Index and Q3 Gross Domestic Product (GDP).

How does the Fed’s stance support the Dollar outlook?

"The FOMC is expected to keep the Fed funds target range steady at 3.75-4.00% after raising rates 25bps in September. Calls for patience from several key Fed officials support a pause. Futures market imply only 10% odds of a hike this week, with a December 9 rate increase virtually fully price in."

"Overall, robust US economic activity and rising price pressures argue for additional Fed funds rate hikes, offering ongoing USD support. The October composite PMI remains consistent with booming private sector growth while the sharp increase in selling prices points to upside inflation risk. Thursday’s September PCE and Q3 real GDP releases will provide the next real data check."

"Headline PCE is seen rising 0.5% m/m vs. 0.3% in August and quicken to 3.6% y/y vs. 3.4% in August. Core PCE is expected to rise 0.3% m/m vs. 0.2% in August and quicken to 3.1% y/y vs. 3.0% in August."

"Real GDP growth is anticipated to rise 3.2% annualized vs. 2.2% in Q2 driven by consumer spending and AI-related business investment. The Atlanta Fed’s GDPNow and New York Fed GDP Nowcast estimates point to Q3 growth of 3.5% and 2.7%, respectively."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)