The dollar has continued to climb, extending its post-Fed announcement advance. The DXY dollar index printed a two-month high at 91.85 and is up by nearly 1.5% over the last day. EUR-USD concurrently pegged a two-month low at 1.1926, while USD-JPY hit an 11-week peak at 110.82.
USD-CAD extended to a fresh six-week high at 1.2346, underpinned by a cocktail of wider U.S. over Canadian yield differentials and a drop in oil prices, with the Fed’s hawkish tilt having unsettled commodity markets. Many developing-world currencies came under pressure, too.
Dollar gains have been concomitant with the spike in U.S. Treasury yields. The policy-sensitive 2-year note yield spiked over 4 bp yesterday to one-year highs above 0.205%. Markets will continue to adjust to the post-FOMC sea change.
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The Fed, to recap, made sharp upward revisions to growth and inflation, with seven Committee members now expecting a hike as soon as 2022. The current Dots show not one, but two rate hikes in 2023. Chair Powell tried to push against worries over a policy shift anytime soon, but the inflation debate is far from over and will remain a prime driver of market direction.
The Fed is still advocating the view that much of the inflation risk will prove to be transitory, due to a combo of pandemic-era statistical base effects and with supply bottlenecks set to shake out. But there are investors who have been putting a high weighting on policy risk.
Their main argument is that the pandemic response (the level of fiscal spending) in major economies is tantamount to a structural shift, and economies, particularly the U.S, are set to run a lot hotter than has been the case for many years. It was notable that among the messages that came from the leaders at the recent G7 Summit, was a clarion cry of “spend, spend, spend”. From here, we anticipate the dollar will retain an upside bias.
The markets today will continue to digest the FOMC and its slightly more hawkish stance. We could see some rebound after the post-FOMC selloff.
Attention will turn back to data now. The calendar features weekly jobless claims, with initial claims expected to dip 6k to 370k, which would be a pandemic low. Continuing claims are seen dropping 19k to 3.480 mln. The June Philly Fed index is penciled in at 33.0 from 31.5.
May leading indicators are forecast to have risen 1.6%, as they did in April. The Treasury announces reopened 2-year FRNs, 2-, 5-, and 7-year notes, and auctions $16.0 bln of reopened 5-year TIPS. The only larger-cap earnings report comes from Adobe and Kroger.
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