US Dollar: Rate hike repricing boosts upside risks – MUFG
MUFG’s Derek Halpenny notes that a sharp rise in the 2-year UST yield, driven by stronger US CPI and hawkish comments from Fed Governor Waller, has revived speculation of a 50bp FOMC hike.
MUFG's Derek Halpenny points out that a significant increase in the 2-year UST yield, fueled by robust US CPI and assertive remarks from Fed Governor Waller, has reignited discussions about a 50 basis point rate hike at the upcoming FOMC meeting. While Halpenny is hesitant that such a hike is necessary, he warns that the market could see a shift towards favoring the dollar, potentially driving EUR/USD below the 1.1000 level.
This speculation stems from Waller's comments preceding the CPI report, rather than the report itself. The OIS market has now started pricing the risk of a 50bp hike on December 9th. Despite this, Halpenny remains doubtful that a 50bp hike is required at this stage, and believes that most will opt for a more conservative 25bp increase.
Another potential scenario to consider would be a strong payrolls report, coupled with a rebound in crude oil prices, which could lead to a more aggressive rate hike. While this remains a risk rather than a core view, it would significantly alter the current balanced expectations among major central banks, putting more pressure on EUR/USD, potentially pushing it below 1.1000.
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