The Federal Reserve is poised to start hiking rates in Q2 2022, and building market expectations for higher terminal rates will support a final act for the USD rally, as reported by economists at CIBC Capital Markets. 

US dollar rally has a final act to come

“The Fed elected to accelerate its taper of asset purchases, remove the reference to ‘transitory’ when referencing inflation in the statement, and acknowledge that the risks to price pressures were higher. Additionally, the latest round of dot projections show the Fed lifting off three times in 2022.”

“We still see upside for the USD into next year.”

“From an endogenous perspective, the USD can rally further as markets begin to price the implied terminal rate for the Fed higher. And there’s good reason to believe that this will happen considering that we’re expecting a sharp reacceleration in activity following the winter Covid wave.”

“Any consolidation or retrenchment should be regarded as an opportunity to adjust hedges.”