Dollar Pauses Ahead of FOMC Meeting as Rate Hike Expectations Soar

The US dollar's four-consecutive-session rise has paused ahead of the FOMC meeting's outcome. The futures market now puts the probability of a federal funds rate hike at 92%, up from 61% a week earlier, driving the currency's surge.

This reassessment of expectations for the upcoming meeting and several subsequent ones has been the main driver behind the US currency's rise. To continue its rally, the Fed must push these expectations even higher by surprising investors.

The White House is urging the central bank not to raise rates, pointing to the lowest core inflation figures since 2021. However, the rapid rally in energy prices and a strong labour market are increasing upside price risks and pushing the Fed towards tightening monetary policy.

A single federal funds rate hike will do little to slow inflation. Monetary tightening takes effect with a time lag; many FOMC officials describe current policy settings as insufficiently restrictive.