US Dollar: Higher yields and data keep Fed repricing in focus – MUFG

MUFG analysts note the US Dollar’s mixed performance as markets reassess Fed policy amid stronger inflation data and rising yields. They highlight the 2-year Treasury yield hitting new highs and see scope for further upside in US rates. However, they stress that FOMC communication has not fully endorsed aggressive hike pricing, leaving the Dollar sensitive to upcoming PCE and Fed speeches.

Rates repricing underpins Dollar tone

"The US dollar performance last week was mixed and this week with optimism elevated over the potential for a peace deal in the Middle East, the US dollar performance remains somewhat muted."

"A retracement of the optimism is a risk and higher volatility would add further support for the dollar over the short-term."

"But the OIS market has a hike fully priced only by December now and we still see dangers of market pricing drifting further forward."

"The US rates market has scope to move further higher."

"Evidence of a pickup in inflation in April from the latest CPI, PPI, and import price reports has encouraged US rate market participants to price in a higher probability of the Fed delivering multiple rate hikes."

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