US Dollar: Fed pricing leg looks stretched – Societe Generale

Societe Generale’s Kit Juckes argues that Fed Funds forward pricing may be nearing the end of its third upward leg this year, with current expectations just below 5% and the US Dollar (USD) having risen alongside each repricing. He notes that further upside in terminal Fed Funds pricing likely requires a significant upside surprise in US core Consumer Price Index (CPI), limiting additional Dollar strength from rates.

Fed repricing and Dollar response

"We appear to be coming to the end of the third leg up in Fed pricing this year. These uplifts in 12-month forward pricing of (effective) Fed Funds, have each taken the Dollar higher."

"Repricing 1-year forward rates from 3.2% to 3.8% at the start of the Gulf crisis helped the DXY above 100; 4.2% dragged the DXY above 101 and getting rate pricing above 4.5% has seen DXY reach 102.the current pricing is just below 5% for the headline Funds rate, which is 20bp higher than the highest of the 65 forecasters in the Bloomberg survey, and 50bp above the consensus."

"Questions about how high bond yields could get have been a feature of many recent conversations. The fact that 10year notes yielded 13% and Fed Funds were above 15% on my first day at work in 1984 is a reminder not to be too surprised by higher yields (the low yields of the post-GFC period were every bit as unusual as the high ones of the early 1990s), but the spike in bond yields will do some work for the Fed and tomorrow’s core CPI data will have to come in well above the consensus 2.5% print, if we are to see any further uptick in market pricing of terminal Fed Funds."

"The dollar has, mostly, tracked US rate expectations higher. That doesn’t have to continue, however."

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