Economists at Credit Suisse discuss the Federal Reserve interest rate decision and its implications for the US Dollar.

Fed surprises with a 25 bps hike (25% odds)

The Fed might find it easier to simply hike again and point to data dependency being a real thing and dominating over its recent language. Clearly, in this situation, the knee-jerk reaction would be a stronger USD. The Fed would need to signal a willingness to keep going even after a hike today and/or also raise materially the “dots” profile (by at least 25 bps for ’23 and ’24 medians) for the USD to build on knee-jerk gains.

Fed holds rates steady but with a hawkish message (65% odds)

This could involve either flagging strongly a 25 bps hike in July or alternatively using other elements like the ‘dots’ to signal hawkishness. Equity market strength is one reason to expect the market to price out quite as fast and deep a Fed cutting cycle from Q4 ’23 onwards as it had priced in. This especially benefits the USD against low / falling yielders like JPY and CNH, and helps support our existing USD/JPY 145.00 near-term target and also our view that USD/CNH can rise easily towards 7.30. 

Fed holds rates steady with a dovish message (10% odds)

This scenario involves the Fed stressing the dovish elements of recent data only and signaling strongly that rates may have already peaked and/or have room to fall quickly, using a combination of language and ‘dots’ that are surprisingly low. Such an outcome would be USD-bearish across the board.