US Dollar: Rate hike repricing boosts upside risks – MUFG

MUFG’s Derek Halpenny notes that a sharp rise in the 2-year UST yield, driven by stronger US CPI and hawkish comments from Fed Governor Waller, has revived speculation of a 50bp FOMC hike. He remains sceptical this is necessary, favouring 25bp, but warns that stronger data and higher Oil could shift expectations further in favour of the Dollar and pressure EUR/USD below 1.1000.

Hawkish Fed repricing supports Dollar

"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. Know more.)