Fed Hawks Dominate Market Expectations Ahead of Rate Decision
The US dollar is strong as markets bet on a 25bps rate increase at Wednesday's Fed decision. The latest inflation data, combined with rising tensions in the Middle East and higher oil prices, has prompted investors to significantly increase their bets of a rate hike.
Last week's producer price index (PPI) jumped to 5.4% year-on-year from an upwardly revised 4.8%, while core PPI rose to 4.6% y/y from 4.3%. Although the consumer price index (CPI) did not show similar accelerations, it remained sticky enough to lead investors to increase their Fed hike bets.
The probability of a rate hike on Wednesday is now at 87%, with another same-sized hike fully priced in for December. By the end of next year, around 90bps worth of rate hikes are baked into the cake.