The US Dollar has maintained most of its gains following the Federal Open Market Committee (FOMC) decision to raise the fed funds rate by 25 basis points, accompanied by hawkish guidance from Fed Chair Warsh. Warsh emphasized that the hike had 'removed a dose of accommodation,' signaling that further action may be required to achieve price stability. The Fed's projections indicate only gradual disinflation, with the year-over-year core CPI rate expected to reach the 2% target in 2029, underscoring the cautious approach to monetary policy [1].
The median dot plot for 2026 and 2027 stands at 4.125%, suggesting one additional hike and no cuts until 2028, when the median drops by 25bps, followed by another 25bps reduction in 2029 to 3.625%. This cautious removal of two hikes pencilled in for this year implies that a faster reduction in core CPI would require more than just one further hike [1].
Despite the hawkish tone, market pricing had already anticipated more tightening, with UST bond yields moving higher ahead of the FOMC decision. The OIS curve was priced for more than the two hikes signaled by the 2026 median dot, which has helped contain the rates and FX reaction for now. The focus has shifted back to incoming data to determine whether those advocating for more than one additional hike will gain influence [1].
Dollar upside is expected to be limited as other G10 central banks, including the ECB, BoE, and BoJ, are set to become more active in hiking rates. MUFG has revised its outlook, now assuming two further hikes for the ECB to 3.00% and two for the BoE, while the BoJ is expected to accelerate tightening. Every G10 central bank except the SNB is priced to hike by year-end. Front-end rate spreads (2-year swap) do not indicate further dollar buying from current levels, except for USD/JPY [1].
CONCLUSION
The Fed's hawkish guidance and gradual disinflation projections support limited upside for the US Dollar, as market pricing had already anticipated further tightening. With other G10 central banks poised to raise rates, the Dollar's gains are expected to be contained. Investors will focus on upcoming data to gauge the likelihood of additional Fed hikes.