The U.S. Dollar is rallying on account of markets feeling sour following a relatively hawkish pause in raising interest rates.
Overview
Although the Fed did not raise interest rates any further, chances of it happening once more this year increased as officials left themselves open to increasing borrowing costs as they see fit. The reality is that regardless of an expanding economy, inflation remains stubborn, and the expectations for price growth have not gone away. We may not be experiencing “stagflation,” but the Fed will still be very data-dependent, and if they deem price growth too high, they will act as they have without hesitation.
Fed Chairman Jerome Powell was sure to set a cautious tone and to be clear that the Fed is not necessarily set on a course of action but rather will be more responsive and reactionary. This ultimately played very well for the Dollar because the Fed does not see an issue with either telegraphing contractionary monetary policy or implementing it.
Chances of a hike in November stand at 31.0%, while around 23.0% for December. Cuts are not even calculated until the end of March. The back-and-forth in the next six months will be interesting and may not dictate a strong dollar as others also cope with the need to have a watchful, not loosening, attitude in their decisions. For now, yields on bonds look highly attractive, with two-year treasuries their highest since 2006. It will naturally take away for risk-appetite across equity exchanges.
What to Watch Today…
- No major economic events are scheduled for today
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GBP ⇓
The Pound has fallen to fresh new lows against the buck since March after the Bank of England’s meeting resulted in a surprise pause from hiking. Although we expected a “dovish hike,” the BOE chose to stay put. Per BOE officials, they have done enough in making borrowing costs significantly higher and displayed worry about causing further damage to economic demand and activity.
Additionally, markets fear that the U.K. will fall into a technical recession as everything from Housing to trade has faced immense challenges all year long. A declining Pound only makes it tougher for consumers to deal with higher inflation that has emanated from a cut of supplies of energy from Russia. Food inflation, which had reached a 46-year high, has only started to calm down some but may resume higher. At the moment, the outlook for the U.K. is dire and filled with uncertainties. The odds of a hike by November are just 42.0%.
MXN ⇓
The Mexican Peso is losing ground despite oil prices climbing, and the hope for higher demand as the globe pushes for a stronger pace of growth going into the fourth quarter of the year. Nevertheless, the Peso has served us a bellwether for the mood in markets, and after a solid run based on good economic data, the negative global growth narrative dictating sentiment is weighing more heavily on the neighboring tender.
