US Dollar Index: Fed hikes repriced on softer inflation – Deutsche Bank

Deutsche Bank Research notes that investors reduced expectations for further Fed rate hikes after softer US PCE inflation, pulling December hike pricing down and lowering 2-year and 10-year Treasury yields. The Dollar Index is slightly weaker, while the bank’s economists still anticipate a relatively hawkish Fed path with two rate increases pencilled in later this year.

Rates repricing and labour data focus

"So investors dialled back expectations of Fed rate hikes, with the amount of hikes priced by December down -7.3bps to 32bps over the week. In turn, that led the 2yr Treasury yield -8.7bps lower over the week (-3.1bps on Friday), whilst the 10yr yield (-8.4bps, -2.3bps on Friday) fell to 4.37%. Pricing of ECB rate hikes by December also fell -12.8bps over the week to 24bps."

"In the US, our economists expect payroll growth on Thursday to slow to +75k (from +172k previously), with private payrolls rising by around +90k. There is some risk of seasonals pulling down the numbers as they have in recent years around this time."

"The unemployment rate is expected to hold at 4.3%, while average hourly earnings are seen unchanged at +0.3% month-on-month."

"On policy, attention will turn to Wednesday, when Fed Chair Warsh speaks at the ECB’s Sintra forum. Our economists continue to expect a relatively hawkish policy path, with two rate hikes pencilled in later this year."

"However, near-term guidance is likely to remain limited, leaving markets to take their cues primarily from incoming data."

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