The Federal Reserve is now very concerned with the acceleration in inflation and is saying it's full-steam ahead on tightening. In the view of economists at CIBC Capital markets, this is the denouement of the dollar dominance story as markets have moved to expect too much tightening from the Fed.

Peak hawkishness portends USD softening

“The big risk now for USD bulls is that we’re close to ‘peak hawkishness’ in terms of market pricing for the Fed. That skews the balance of risks to the USD to the downside for the latter part of the year.”

“As the Fed progresses on its path to hike rates and shrink its balance sheet via QT, investors should keep close tabs on the deceleration in inflation and growth, and the potential for a covid comeback, which would lend merit to our call for a more moderate dose of 150bps from the Fed this year, including the March hike.” 

“Currency markets will be especially sensitive to any shift in tone from Fed speakers should that be the case.”