MUFG: Even a hawkish Powell today may not lift the dollar | Forexlive

MUFG argues that despite a possible hawkish tone from Fed Chair Powell at today’s FOMC meeting, market dynamics suggest the USD is unlikely to benefit meaningfully. Structural uncertainty and expectations of economic slowdown continue to weigh on the dollar, even as rate differentials have shifted modestly in its favor.

Key Points:

• No policy change expected:
  The Fed is set to leave rates unchanged, so focus shifts entirely to the tone of the statement and Powell’s press conference.

• Economic language in focus:
  March’s statement described the economy and labor market as “solid.” With Q1 GDP contracting by 0.3%, markets will watch whether this language softens—a change would be dovish.

• Jobs market likely still “solid”:
  The April NFP gain of 177k was better than expected, even accounting for prior downward revisions, which should help preserve the Fed’s current jobs assessment.

• Market ignoring rate spreads:
  Despite a 10bp move in the 2-year EU-US spread in favor of the USD since April, EUR/USD is up nearly 5%, suggesting rate differentials are not driving FX right now.

• Sentiment and uncertainty dominate:
  With widespread concerns about a weaker economy and persistent trade/tariff-related uncertainty, MUFG believes that a hawkish Powell is unlikely to reverse USD weakness.

Conclusion:

MUFG cautions that expecting a dollar rally from today’s FOMC may be misplaced. Even if Powell delivers a relatively hawkish message, the broader macro narrative—marked by economic uncertainty, poor sentiment, and growing expectations for Fed easing—keeps risks skewed toward further dollar weakness.

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