Dollar Gains Taper as FOMC Swaps Price 85% Chance of Tightening

The US Dollar Index is firm at the start of FOMC week as swaps now price an 85% chance of tightening on Wednesday, according to Scotiabank strategists Shaun Osborne and Eric Theoret.

This shift in expectations follows last week's US inflation data, which has led to a significant increase in the likelihood of a rate hike. Swaps reflect 21bps (or 85%) of tightening risk for Wednesday, with only a very narrow majority of respondents favoring a hold, according to the Bloomberg survey.

The USD is currently fairly valued versus front-end spreads, but further gains above 100 would require a significant move in yield differentials. Scotiabank strategists doubt the Fed is ready to deliver such a move.