USD supported by less dovish Fed and political uncertainty: Macquarie

Investing.com -- The U.S. dollar is likely to remain supported as traders increasingly accept a less dovish Federal Reserve, signs of resilient domestic growth and softer conditions abroad, according to Macquarie strategists Thierry Wizman and Gareth Berry.

Macquarie says traders have “accepted the prospect that the Fed is not very likely to cut its policy rate on December 10,” with the probability of a December cut in USD OIS markets now “below 50%, making an ‘on hold’ decision the ‘new baseline’.”

The shift follows a series of hawkish speeches from Fed officials, which Macquarie says the market has now absorbed.

Underlying data also support the Fed’s reluctance to ease further. Macquarie notes that tracking estimates, including the Dallas Fed’s Weekly Index, suggest U.S. real growth was “above 2% in Q3 and early Q4,” while the daily Truflation series indicates inflation remains sticky.

Earnings have also outperformed, with Q3 results showing “a 13.1% year-over-year growth rate against expectations of 8.3%.”

Macquarie argues that rules-based measures, including the Taylor Rule, “don’t suggest that policy is restrictive currently.”

The Cleveland Fed’s update to its simple monetary policy rules places the median neutral rate at 4.33%, “close to where the Fed’s policy rate sits now,” while other regional Fed estimates bracket the current rate.

The firm added that this backdrop “calls into question the ‘consensus’ that the Fed must continue to cut its policy rate.”

The bank adds that if the current cycle is merely a “mid-cycle adjustment,” it should not resemble broader easing phases, noting that such adjustments in 1994 and 1998 “were much shallower than the rate-cutting cycles typically associated with actual downturns.”

Macquarie also highlights political uncertainty abroad, including Chile’s election, where José Kast appears poised to win, marking another shift toward “pro-growth, pro-US” governance in Latin America.

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