The dollar struggled ahead of the Fed decision on May 4, suggesting traders were bracing for a widely expected dovish rate hike of 25 basis points, with the main focus on rate guidance and Fed Chairman Jerome Powell’s comments. press conference.
Current guidance states that the committee “anticipates that some additional policy tightening may be appropriate.”
However, the Fed is likely to soften the language of its rate guidance to reflect heightened concerns surrounding a regional banking crisis and an expected tightening in credit conditions.
This could be done by removing forward guidance entirely, which would be a stronger hint of a pause in rate hikes and thus a more negative impact on the dollar.
In addition, the Fed is also likely to take a more nuanced meeting-by-meeting approach, which would indicate that while the base case is for a pause in rate hikes, this will depend on incoming data and this could still lead to a weaker dollar.