USD After The Fed: Back At The Crossroads; What's Next? - Nomura

The surprised dovishness of the Fed is leaving its mark on the rates market and USD.

In our view, it seems as though USD may be returning to where it was in February, unable to decide whether to appreciate or to depreciate in the medium term. As our rate strategy team points out it may be difficult for rates markets to price in more than one hike at a time. This means that the case for USD appreciation may be losing some support.

It will take time and unambiguously strong data for the rates market to heal and for rates investors to be willing and convinced to price in a more aggressive fed fund rates path. Only then will USD be able to resume its march higher.

This means that USD is likely to trade on its back foot for some time, which will likely have some repercussions on countries that were hoping for a weaker local currency.

From a trading perspective, we think that USD will likely trade on its back foot for some time, so USD crosses are likely to trade with factors specific to the crosses, rather than on general USD strength or weakness.

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