US Dollar Surges Ahead of FOMC as Markets Expect Hawkish Fed

The US dollar has made a significant recovery and is now trading near its year-to-date highs ahead of tomorrow's Federal Open Market Committee (FOMC) meeting. MUFG's Lee Hardman notes that despite softer energy prices and a small pullback in US Treasury yields, markets are positioning for a potentially hawkish Federal Reserve.

The de-escalation of military tensions has helped ease upward pressure on energy prices, while central bank rate hike expectations remain high. The two-year US Treasury yield has dropped back by around 7bps from last week's high, but market participants are still wary of a hawkish policy update from the Fed.

Despite this, MUFG still expects rates to be left on hold, which would give the Fed more time to assess inflation risks over the summer. However, Hardman highlights the risk of dissent and unclear forward guidance, indicating that markets are expecting a hawkish policy update.