Dollar Strengthens Ahead of FOMC as Fed Hike Expectations Rise

The US dollar has firmed sharply ahead of this week's Federal Open Market Committee (FOMC) decision, helping it retain its bid and even recover from last week's selloff against the Japanese yen.

Fed hike expectations have risen dramatically in recent days, with futures pricing a 90% chance of a 25bp rate increase on Wednesday, up from around 70% before Friday's consumer price index (CPI) report. The major banks Goldman Sachs, JPMorgan, HSBC and Deutsche Bank have all shifted their views to favor a September hike, while markets are also leaning towards another increase in December.

A Reuters poll found that 86 of 101 economists expect the Fed to hike this week, with futures implying roughly four hikes by July 2027. Firm CPI and PPI data, resilient economic activity, and the renewed oil shock have all contributed to the repricing of interest rate expectations.