US Dollar: Hawkish Fed expectations underpin strength – OCBC

OCBC’s Sim Moh Siong and Christopher Wong highlight that higher Oil prices and renewed US-Iran tensions have pushed global bond yields higher and strengthened the US Dollar, with markets fully pricing a 25bp Federal Reserve (Fed) rate hike by October. Fed Governor Barr’s comments that further rate increases may be warranted reinforce this hawkish backdrop, while they remain modestly constructive on the USD through early 2027.

Higher yields and policy repricing

"The renewed escalation in the Middle East has brought inflation risks back into focus, pushing global bond yields higher. The move was accompanied by a bearish flattening of the US yield curve, a stronger USD and lower gold prices as markets moved to fully price a 25bp Fed rate hike by October."

"Fed Governor Barr reinforced the hawkish policy backdrop, stating that further rate increases may be warranted if inflation fails to moderate. His comments build on Chair Warsh's hawkish message at Jackson Hole."

"Meanwhile, JOLTS job openings data continues to point to a low-hiring, low-firing labour market. The recent uptick in the vacancy-to-unemployment ratio suggests the moderation in wage growth could soon stabilise."

"We have updated our FX forecasts to reflect recent market moves following the USD's weakness during a period of policy uncertainty triggered by the Treasury's surprise EUR/JPY intervention and expanded buyback programme. Despite these adjustments, we remain modestly constructive on the USD through early 2027."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)