MUFG Research strategist Derek Halpenny said rising yields and wider credit spreads could already be slowing the U.S. economy, a factor that may shape the dollar's response to Wednesday's Federal Reserve decision.
Halpenny said a hawkish tone was expected from the Federal Open Market Committee (FOMC). MUFG cited overnight index swap pricing that implied about a 10% chance of a rate increase on Oct. 28 and described a December hike as highly likely in market pricing. The Fed's previous decision, on Sept. 16, raised its target range by 25 basis points to 3.75%-4%.
Halpenny described the dollar as under upward pressure ahead of the decision. He said that if tighter financial conditions are restraining economic activity, expectations for further Fed action in 2027 could ease.
The Reserve Bank of New Zealand (RBNZ) held its official cash rate at 2.75% on Wednesday. The committee voted 4-3, with three members favoring a 25-basis-point increase to 3%. Halpenny said the New Zealand dollar fell more than 1% against the U.S. dollar after the decision.
New Zealand's annual consumer price inflation slowed to 3.7% in the September quarter from 4.1% in June, the RBNZ said. The bank said inflation could rise to 4.4% in the December quarter, largely reflecting fuel futures prices. The four members who backed holding rates cited time to assess two recent increases and the risk of a weak recovery; the three who favored a hike warned inflation could become entrenched.
The Fed was scheduled to announce its decision at 2 p.m. ET (18:00 UTC) Wednesday, followed by a press conference at 2:30 p.m. ET (18:30 UTC), according to MUFG's calendar. The FOMC's next meeting is scheduled for Dec. 8-9.
