The upcoming FOMC meeting on Wednesday will most likely be focused on term interest rates. Long-term rates in the US have been rising immensely due to rising inflation expectations as the economy rebounds from the pandemic recession. The question ahead of this FOMC meeting is how much long-term interest rate increases can the Fed tolerate?

The Fed has largely said it would be patient about inflation, so we think there is potential for the Fed to allow these moves to continue. After all, interest rates are still not at 2019 highs. If long-term rates continue to sell-off the way they have, the broad dollar should continue its bounce, particularly against EURUSD. There is evidence that even if the Fed decides to control long-term rates by increasing their asset purchases, EURUSD will continue to fall. Here’s a chart from Nordea showing EURUSD during QE and “Operation-Twist”- a program the Fed engaged in to bring down long-term rates.