Scope for Fed funds rate expectations to adjust higher in favour of a firmer USD – BBH

Higher US consumer inflation expectations can further curtail money market expectations of Fed funds rate cuts this year and turbocharge USD higher, economists at BBH say.

Will USD rally get turbocharged?

We see scope for Fed funds rate expectations to adjust higher in favour of a firmer USD because underlying US price pressures are still high, and the economic growth outlook is encouraging. 

The risk to our bullish USD view is the Fed dismissing the latest high inflation readings as noise and power forward with a dovish stance. This would lead to lower US real interest rates and undermine USD against most major currencies.