US Dollar Regains Correlation with Long-End Yields Amid Hawkish Sentiment

The US dollar is tentatively regaining its correlation with long-end yields, bolstered by the smaller-than-expected $6bn Treasury buyback announcement. This has led to a positive reaction in the USD's short-term outlook.

A hawkish European Central Bank (ECB) meeting delivered a surprise hike, revising inflation projections higher across the forecast horizon. The key takeaway is that it gave markets the green light to preserve an almost uncapped correlation between oil prices and rate expectations.

The August Consumer Price Index (CPI) release can provide the green light for a Federal Reserve hike next week, even with a marginal upside surprise. Consensus stands at 0.2% month-on-month for core and 0.4% for headline inflation.