US Dollar Index Rises Amid Strong Market Expectations for Further Rate Hikes
The US Dollar Index (DXY) rose 0.2% to 100.43, extending gains following last week's 25bps Fed rate hike to 3.75-4.00%. St Louis Fed President Alberto Musalem emphasized the need for further tightening due to persistent inflation, while Chicago Fed President Austan Goolsbee highlighted risks from strong demand.
Markets now price an 88% probability of another hike by December and two further hikes in 2027, but our year-end view diverges slightly, expecting only one hike in H1 2027. This discrepancy may limit USD upside as inflation moderates over the longer term.
The EUR/USD fell 0.2% to 1.1465 due to a firmer USD and renewed European political uncertainty. Germany's regional election results added domestic pressure on Prime Minister Merz's ruling party, while the French-German 10-year government bond yield spread widened above 100bps amid concerns over France's fiscal outlook.