The US Dollar Index exhibited a narrow range of movement during the Asian trading session on Wednesday, currently hovering around the 99.50 level. This follows two consecutive days of decline. The recent short-term weakness coincides with a slight adjustment in institutional views regarding the Federal Reserve's interest rate cut timeline.
UBS Global Wealth Management recently revised its outlook for Federal Reserve monetary policy, pushing back the timing of the first interest rate cut to March and June of 2027, with 25 basis-point reductions each time. The firm explicitly stated that no easing measures are anticipated this year.
The institution believes this week's monetary policy meeting, the first chaired by new Fed Chair Waller, will adopt a more hawkish tone.
This forecast revision is primarily based on the current complex economic and geopolitical landscape. UBS analysts noted in a report that, despite Waller's previously expressed relatively moderate views, Fed policymakers are expected to demonstrate stronger policy resolve in the statement released from this meeting.
The market widely anticipates that the two-day FOMC meeting will keep the federal funds rate target range unchanged at 3.50%-3.75%.
Hawkish Signals Expected to Dominate This Week's Meeting
UBS posits that, despite the temporary US-Iran agreement and a packed schedule of central bank meetings, major central banks will not hastily shift to a dovish stance due to short-term geopolitical easing. Instead, they will maintain caution, closely monitoring data in the coming months to assess whether energy price shocks could trigger a second wave of inflationary pressures. This stance aligns with a shift in market expectations, as indicated by client surveys from institutions like Goldman Sachs: the probability of a December rate hike has risen to approximately 60%, and investor optimism for rate cuts within the year has significantly diminished.
The UBS Global Wealth Management team emphasized that robust employment data, persistent underlying inflation, and geopolitical uncertainty collectively form the basis for the Fed maintaining a restrictive policy rate for a longer period. New Chair Waller's debut will be a crucial window for the market to observe his communication style and policy direction, with particular focus on whether he will reduce forward guidance and reinforce a data-dependent approach.
Bond and Dollar Market Reactions
Against the backdrop of UBS's latest forecast, bond investors continue to employ neutral duration strategies, increasing holdings of short-term, high-quality bonds to navigate volatility. The US Dollar Index may find support from rising expectations for further rate hikes.
Overall, UBS's perspective further reinforces the market's cautious pricing of the Federal Reserve's policy path.
On the daily chart, the US Dollar Index retreated for two consecutive days after reaching a high of 100.31, with the price testing support near the 20-day moving average around 99.60, indicating intensified short-term battles between bulls and bears. The overall moving average system maintains a bullish alignment, with the 20, 50, 100, and 200-day moving averages providing layered support from top to bottom. The medium-term uptrend structure remains intact, with key defensive support located around 98.80, where several medium- and long-term moving averages converge.
The MACD indicator is above the zero line, but the DIFF line has crossed below the DEA line, with the histogram turning negative, signaling a clear weakening of bullish momentum and the emergence of short-term correction signals. The RSI has retreated to the 53 range, moving away from the previous overbought zone near 70, suggesting a continuation of the corrective phase following the prior rally.
Key Questions Answered
Why did UBS postpone the Fed rate cut forecast to 2027?
UBS does not expect any policy easing this year, citing strong employment data, the risk of a second wave of inflation from energy price shocks, and ongoing geopolitical uncertainty. The firm adjusted its first-rate-cut forecast from late 2026 to March and June 2027, with 25 basis-point cuts each, emphasizing the Fed's need for cautious data observation.
What is UBS's prediction for the tone of this week's Fed meeting?
UBS expects Chair Waller's first FOMC meeting to deliver hawkish signals, presenting a more forceful stance in the policy statement and dot plot. While the market expects rates to remain unchanged at 3.50%-3.75%, the meeting will avoid a hasty dovish pivot due to the US-Iran agreement, prioritizing inflation assessment. This aligns with current market pricing, which assigns about a 60% probability to a December rate hike.
How do current geopolitical factors affect Fed policy expectations?
Although the temporary US-Iran agreement may lead to lower oil prices and increased supply, UBS believes the lagged effects of the energy shock still require monitoring, as they could push inflation higher. Several central banks, including the Fed, will maintain caution during this week's meetings, unwilling to ease prematurely to guard against second-round inflation effects. This context also explains the bond market's shift to neutral duration strategies and expectations for a stronger dollar.
What is the significance of Chair Waller's debut meeting?
This meeting marks Waller's first policy statement as Chair, with the market watching for potential changes in his communication style, such as reduced forward guidance or a diminished role for the dot plot. UBS believes that, despite Waller's previously moderate views, the overall meeting tone will be hawkish, influencing market judgments on Fed independence and the future policy path.
What are the implications of UBS's forecast for investors?
Investors should maintain a defensive posture, focusing on short-term bonds and high-quality fixed-income assets. The US dollar may find support, while volatility in equities and risk assets could increase. In the long term, the policy path is highly dependent on inflation and employment data, warranting close attention to the FOMC statement and Waller's press conference. The overall environment highlights uncertainty around 2026 monetary policy, making prudent management of interest rate risk crucial.
As of 11:13 Beijing time on June 17, the US Dollar Index was quoted at 99.52.
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