DXY likely to pare some gains and pull back amid prospects of ECB’s tapering announcement, says Scotiabank

The United States’ dollar index is expected to pare some gains and pull back amid the prospect of the European Central Bank’s (ECB) tapering announcement, according to the latest research report from Scotiabank.

The odds of future rate hikes at 2018’s major Federal Open Market Committee (FOMC) meetings declined a couple of basis points as the statement from yesterday’s policy meeting was less hawkish than market expectations, which could bring a brief relief to EM Asian currencies.

The central bank decided to maintain its federal funds rate at 1.50-1.75 percent as widely expected, reiterating it remains on track for a gradual pace of rate hikes in the months ahead

"However, we think sound US fundamentals could spur and intensity market concern that the Fed will forecast total four 25 basis points rate hikes this year in the June "dot plot," although the market hasn't fully factored in a fourth rate hike in December", the report added.

Seven of the 15 top Fed officials have expected at least four rate rises in 2018 according to the March "dot plot", compared to only four of 16 participants at the December meeting. Despite rising risks of technical corrections, resumed monetary policy divergence between the Fed and other major central banks such as the ECB will continue to boost the DXY index and weigh on EM Asian currencies in the run-up to the June 12- 13 FOMC meeting.

The Fed repeated in the statement that "economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate," while ECB policymakers see scope to wait until their July meeting to announce how they will end their bond-purchasing program.

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