US Dollar: Why Rate Hike Repricing Is Raising Upside Risks – MUFG

The Dollar could gain further support and EUR/USD could come under pressure below 1.1000 if stronger data and higher oil prices push rate expectations higher, according to MUFG’s Derek Halpenny. A sharp increase in the 2-year UST yield, fuelled by stronger US CPI and hawkish remarks from Fed Governor Waller, has brought speculation about a 50bp FOMC hike back into focus. Halpenny nevertheless doubts that such a move is needed and favours 25bp.

Could hawkish Fed repricing give the Dollar further support?

"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.)