Dollar Strengthens on Hawkish Repricing, Market Awaits Confirmation
The US dollar has strengthened at the start of this week due to expectations that the Fed will begin tightening monetary policy, according to MUFG Research. This has helped lift the dollar index above its 200-day moving average at around 99.150.
The hawkish repricing at the short-end of the US yield curve triggered by stronger US inflation data last week has boosted the US dollar. The 2-year US Treasury yield jumped higher by around 26bps, with market participants pricing in a more active Fed tightening cycle in response to upside inflation risks.
The Fed is expected to begin their tightening cycle as soon as this week, with 22bps of hikes priced in for this week's FOMC meeting compared to around 15bps a week ago. The US CPI report for August revealed that core inflation picked up by 0.3%M/M, adding to concerns over the lack of disinflation progress towards their 2.0% target.
Fed Chair Kevin Warsh indicated in his Jackson Hole speech that they would need to tighten policy if underlying inflation was not continuing to slow back towards target with sufficient pace. The August report could be used as justification to begin tightening policy at this week's meeting, particularly given the recent price plan changes by AT&T and T mobile.