The Fed’s hawkish stance also supports the upward pricing of the US dollar.
Positions in the options markets indicate that investors expect the dollar to continue to rise.
The difference between the premium of put options and the premium of call options, known as the “Risk reversal,” indicates that for the next month, dollar call option premiums versus put option premiums will have the largest difference since November.
Institutions expect an increase in the dollar
“We haven’t seen a policy surprise from the Fed for a long time. “This is a case that supports the dollar, even though it’s a big risk for currencies,” said Steven Barrow, Director of Currency Strategy at Standard Bank.
Historically, the dollar’s strength will diminish over time as the Fed enters a more predictable tightening cycle, but according to some strategists, the situation may be different this time around.
Strategists say Powell continues to surprise the market with messages that pave the way for faster rate hikes. TD Securities strategists, including Jim O’Sullivan, shared a note that the Fed is not cautious about the need for aggressive tightening, adding, “This supports our expectation of additional resistance in the dollar this year.”
John Velis, BNY Mellon FX, and Macro Strategist, also predicted that real yields and the US currency will continue to move together, at least until the first Fed rate hike.