MUFG analysts Lin Li, Michael Wan, Lloyd Chan and Khang Sek Lee argue that firmer US inflation and resilient labour markets underpin a higher-for-longer global rates backdrop, supporting the US Dollar. They expect the Federal Reserve to stay on hold at the upcoming FOMC, with new Chair Kevin Warsh’s guidance seen as key for USD direction and Asian currencies.

Fed on hold but guidance crucial

"The week ahead is a pivotal one for FX markets, with a flurry of central bank meetings across the US, Japan, and key Asian economies set to reinforce a “higher-for-longer” global rates backdrop."

"The combination of firmer US inflation and resilient labour market conditions should support the US dollar, while driving greater differentiation within Asia FX amid geopolitical risks in the Middle East."

"While US retail gasoline prices have eased modestly, they remain elevated relative to pre-conflict levels, continuing to feed through into inflation."

"With US headline CPI rising above 4%yoy and 1-year inflation expectations firming further, the risk of second-round effects is increasing, limiting the Fed’s scope to ease."

"The upcoming FOMC meeting will be critical, not for policy change - we expect the Fed to remain on hold - but for forward guidance."

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