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Fed 50bp Rate Hike Speculation Supporting The US Dollar

USD - US Dollar

With global equities in the green and oil prices halting their rebound, markets went searching for risk once again yesterday in the FX market. The dollar weakened on improved sentiment, but there remains a supportive undercurrent offered by rising hawkish bets on Fed tightening. The futures market is fully pricing in 75bp of tightening in the next two meetings, which implies at least one 50bp increase. Expectations about half-percentage increases have been boosted by recent comments by Chair Jerome Powell and other FOMC members.  Fed speakers will remain in focus today amid a lack of market-moving data drivers. Powell will speak again and may shed more light on his apparent openness to 50bp hikes. He will be followed by remarks from Mary Daly and the arch-hawk Bullard. Observe the foreign exchange rates.

CAD - Canadian Dollar

The CAD was a mid performer overnight and failed to benefit from the positive risk mood in the same way as its commodity peers. USD/CAD is trading just below 1.26 to start the day.  Crude oil prices have dropped a little but still holding on to a range of around $110/barrel. With crude still trading well north of $100 and commodity prices generally elevated while broader market volatility continues to recede, most remain bullish on the CAD outlook— although rising US yields may become a headwind for the CAD if domestic yields fail to keep up. 

EUR - Euro

A number of European Central Bank speakers yesterday cemented the notion that the ECB is set to remain a bystander for the next couple of meetings while the Fed presses on with more aggressive tightening. Policy divergence and growth divergence (the latter exacerbated by the war in Ukraine) are putting a cap on any recovery in EUR/USD around the 1.1100 area 

GBP - British Pound

The pound was little moved this morning – following a big rally yesterday – as CPI figures in the UK showed an above-consensus acceleration in inflation. The headline rate reached 6.2% and the core advanced to 5.2% in February. These latest figures are likely to impact the BoE’s commentary in the short term. On the calendar today is the announcement of the so-called “mini-Budget” by Chancellor Rishi Sunak. The focus will be on any cut in fuel duty, increases in national insurance thresholds, and more generous corporate tax breaks to encourage investment. The combination of above-consensus inflation, some potential hawkish comments could support the view that the BoE will have more room for monetary tightening, ultimately helping the pound today.  

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