The fantastic US inflation data has strengthened market expectations for an increase in the Fed's interest rates, so that bond yields and the US dollar exchange rate have climbed.
The US dollar index (DXY) continues to circulate at its highest range since July 2020 above the 95.00 threshold in early European trading this Friday (12/November).
The fantastic US inflation data has strengthened market expectations for the Fed's interest rate hike in 2022, so that bond yields and the US dollar exchange rate are solidly up.
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DXY Daily |
Market participants currently expect the first post-pandemic Fed rate hike to take place in July 2022, followed by a second hike in November.
CME data indicates a 50% chance of a gain in those periods, an increase compared to a 30% chance a month ago.
Consequently, yields on short tenor US Treasury bonds accelerated. Yields for 5-year bonds have even reached a record high since February 2020.
These factors are supportive of the greenback's current rally, as well as support further gains as long as expectations of a "Fed rate hike" continue to dominate the market.
"We don't think this is the end of the (USD-red) bullish run and (we) expect the US dollar to remain strong through the first half of 2022, as we will enter the first half of 2022 as the Fed's tapering ends and increases. interest rates after that will support the dollar in this period," said a strategist at Mizuho Securities quoted by Reuters.
The strengthening of the US dollar also increased the volatility of the currency market, as traders flocked to buy options to protect their trading positions from further USD rally.
The currency volatility index recently touched a record 6-month high.
Another factor influencing the current strengthening of the US dollar is the loose policy outlook of Uncle Sam's overseas central banks.
Recent European economic data guarantees the ECB will keep interest rates low according to its long commitment, so that the Single Currency collapses versus the Greenback.
Meanwhile, Cable was weighed down by the delay in the BoE rate hike, the resurgence of the UK-EU dispute, and the risk of slowing economic growth after the end of the government's pandemic subsidies.
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