MUFG’s Lee Hardman notes the US Dollar remains firm after last week’s breakout, driven by a hawkish repricing of Fed rate hike expectations and a rebound in US yields. Markets now see roughly even odds of a near-term Fed hike, even as Oil prices fall on progress in US-Iran talks. MUFG highlights that lower energy prices and fading tariff effects could later reduce the need for further tightening.

Dollar supported by yields and Fed repricing

"The US dollar has continued to trade at stronger levels overnight after breaking higher least week triggered by the hawkish repricing of Fed rate hike expectations."

"The latest price action highlights that the negative shock for the US yields and the US dollar from last year’s tariff hikes is reversing supported by building evidence that the US economy is continuing to grow solidly and downside risks for the labour market have eased."

"The recent run of positive US economic data surprises and hawkish Fed policy communication has encouraged market participants to price in almost a 50:50 probability of a rate hike as soon as next month."

"With the US mid-term election taking place later this year in November, it could be easier for the Fed to hike rates sooner rather than later."

"In addition, if they hold off from hiking rates soon then slowing inflation from lower energy prices and the fading impact of tariff hikes should dampen the need for hikes later this year as well."

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