CACIB: USD - A Parting Gift - FJElite

Ahead of what is expected to be Jerome Powell’s final policy meeting as Fed Chair, the FOMC is expected to keep rates unchanged while offering an updated assessment of how the Middle East crisis is affecting the US economy and inflation. The economy has held up relatively well since the March meeting, even as both headline and core inflation have accelerated. Financial conditions have also stayed broadly supportive, with markets recovering quickly after the initial war shock and then getting a further boost from the US-Iran ceasefire announcement in early April. That backdrop suggests the Fed will stick to its data-dependent approach and continue to monitor how the conflict feeds through to growth and inflation.

US rates markets are currently pricing steady Fed policy through most of 2026, followed by a 25bp cut in 2027, while Kevin Warsh’s nomination has so far had little effect on pricing. That suggests investors do not expect a meaningful policy shift simply because of the coming leadership change. The view here is that lingering inflation pressure tied to the Iran war will keep rates on hold for longer, helping the USD retain support from its relative yield advantage. The April meeting itself may not be especially eventful for FX, but a hawkish surprise cannot be ruled out. If Powell again emphasises the inflation risk from the war while downplaying the hit to growth, the dollar could get another lift from relative rate support.