This week’s pivotal FOMC decision set the tone for FX markets when the Fed kept up its dovish stance despite the markets’ fear of the economy overheating which was reflected in rising yields across the whole curve. The economic developments since January’s meeting, namely faster vaccine rollout and the passing of the $1.9trn fiscal stimulus package, were not enough to convince the Fed to change its median forecast to signal a rate hike was likely in 2023. Coupled with dovish commentary from Chair Powell, the US dollar to weakened across the board while real yields dropped as expectations of policy normalisations were pushed back. Fixed Income markets reversed price action just a day after the Fed’s dovish surprise, however, indicating that the Federal Reserve will likely have to keep reinforcing the dovish message throughout its policy communications in order for markets to have no doubt in them as markets remain more hawkish in the battle between Markets vs the Fed. While the Fed may not give into the hawkish signs in the economy, the renewed optimism in the outlook for the global economy following the vaccination roll-outs and the greater US stimulus continues to push up inflation expectations, especially in economies with better economic outlooks. For emerging markets, this is a sign of alert as they brace for an era of rising interest rates after the cutting cycles that were introduced in the pandemic. Meanwhile, the Norges Bank signalled a rate hike as early as H2 2021, marking the first explicit rate hike signal in the DM space. Brazil raised rates this week along with the Central Bank of the Republic of Turkey, while Russia hiked by 25bps on Friday and signalled further tightening lies in store. Additional rate hikes by central banks in the EM space will likely materialise in the coming months while the divergence with the Federal Reserve’s policy widens, and this divergence will filter through in FX markets going forward.