Dollar Firms Ahead of Key Central Bank Decisions Amid Rising Oil Prices
The US dollar strengthened on Monday ahead of key decisions from the Federal Reserve and Bank of Japan. The yen's recent rally stalled near a seven-month high as investors weighed possible rate hikes from these central banks.
Oil prices rose sharply after new attacks in the Middle East, pushing Brent crude futures to $106.7 per barrel. This increase in oil prices dampened risk sentiment and contributed to the dollar's firmness.
The European Central Bank raised rates last week and warned of further hikes ahead of Wednesday's Fed policy decision and Friday's BOJ rate hike. The Bank of England is expected to stand pat on Thursday, but its voting may be close.
Markets are heavily conditioned for a hawkish week, with traders pricing in an 86% chance of a Fed rate hike this week and another move higher later in the year, according to the CME FedWatch tool. Kieran Williams, head of Asia FX at Intouch Capital Markets, noted that the bigger FX surprise risk is probably not who hikes, but who fails to validate current pricing.
The euro was 0.28% softer at $1.1565, while sterling last bought $1.3503. U.S. Treasury yields remained near multi-year highs, with the 2-year yield inching away from a two-year high to 4.61%, after rising 26 basis points last week.
Analysts expect the BOJ to hike roughly once every quarter, departing from its gradual, semi-annual pace. A failure to deliver another rate hike later this year could risk a knee-jerk dollar/yen rally back to 157 to 160, according to TD Securities.