US Dollar: Upside risks increase as markets reprice rate hike expectations – MUFG

Stronger US CPI and hawkish remarks from Fed Governor Waller have driven a sharp increase in the 2-year UST yield, renewing speculation about a 50bp FOMC hike, according to MUFG’s Derek Halpenny. While he doubts that a move of that size is needed and favours 25bp, he cautions that stronger data and higher oil prices could tilt expectations further towards the Dollar, putting EUR/USD under pressure below 1.1000.

Dollar gains support as markets reprice hawkish Fed outlook

"On this occasion the market rethink is to consider the prospect of a 50bp hike. This is only now being considered because of Waller’s comments prior to the CPI report rather than the CPI report itself. Waller’s comment that a stronger CPI print may warrant a 50bp hike has sparked a debate over whether Waller had knowledge of the CPI print."

"The OIS market is now partially pricing the risk of a 50bp hike on 9th December."

"We remain sceptical of the need to hike by 50bps at this stage and suspect the majority will see the better risk-reward in going by 25bps. We still have another payrolls report (but no further CPI prints, although it’s the day after) before the FOMC meeting and a strong print plus a rebound in crude oil after the recent sharp drop would be one scenario of a possible more aggressive hike."

"It’s still more a risk than a core view but it would alter the current balanced expectations in the markets across key central banks and shift rate hike expectations much more in favour of the dollar that would likely prompt a further lurch lower in EUR/USD and bring levels below the 1.1000-level into play."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Learn more.)