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Dollar Soars on Fed Hike Bets
29 Sep
Summary
- US inflation and rising Treasury yields fuel expectations for a longer Fed tightening cycle.
- ECB maintains a cautious stance on policy easing, while BoE hike bets are building.
- The US Dollar Index is expected to strengthen, with EUR bearish and GBP bullish outlooks.
The US dollar exhibited strength on Tuesday, buoyed by increased investor expectations of a prolonged Federal Reserve tightening cycle. This sentiment was fueled by higher U.S. inflation and a rise in Treasury yields, with current projections indicating a 70% probability of a third consecutive 75 basis point rate hike at the upcoming FOMC meeting. Two-year U.S. Treasury yields climbed significantly, nearing 5%.
In contrast, the European Central Bank (ECB) has adopted a less aggressive policy stance. Recent indications suggest the ECB does not anticipate energy costs to trigger significant "wage cost push" inflation, allowing them to remain on the sidelines for now.
Meanwhile, expectations for UK inflation are on an upward trend, with surveys showing increased inflation outlooks for the coming year. Senior Bank of England (BoE) officials' recent signals have been interpreted as dovish, though investors are assigning an 85% probability to a 25 basis point increase at the November BoE meeting.
Technically, the US Dollar Index is approaching resistance at 101.40. As long as the support at 101.01 holds, the index is expected to continue trading within a rising channel and push higher.
