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Why TD Securities Sees Fed Holding Rates Longer
TD Securities argues the Fed will maintain a hawkish bias and hold rates longer than markets expect. Here's how that shifts USD, yields, and pair positioning.
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TD Securities published a note arguing the Federal Reserve will maintain a hawkish bias and extend the hold on interest rates longer than current market pricing implies. The call directly challenges the consensus that rate cuts begin in the second half of the year. For forex traders, the implication is a sustained USD bid and a slower repricing of rate differentials across the G10 space.
The naive read of this note is simple: if the Fed stays hawkish, the dollar strengthens. The better market read requires tracing the transmission through yields, positioning, and carry. A hawkish hold means the fed funds rate stays at its current peak while other central banks either cut or signal easing. That widens the rate advantage for the dollar. Two-year Treasury yields should remain elevated relative to bunds or gilts, reinforcing the dollar's carry appeal. Leveraged funds that have been short USD may need to cover, adding a positioning tailwind.
Transmission Through Yields and the Dollar
The first leg of the trade is EUR/USD. If the Fed holds while the European Central Bank moves closer to a cut, the rate differential pushes EUR/USD lower. The pair has already tested support near the 1.07 area. A hawkish Fed note from TD Securities reinforces the case for a break below that level. The next leg is GBP/USD, where the Bank of England faces its own growth-inflation trade-off. A Fed hold keeps the dollar bid against sterling, especially if UK data softens.