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The US dollar begins its week with renewed fundamental support as soaring inflation and the Middle East energy crisis strengthen the case for another rate hike by the Federal Reserve. U.S. producer prices rose 0.4% in August and are another sign that pressed energy prices are beginning to impact inflation. Almost three-quarters of the bets made in Futures markets indicate that the Federal Reserve is expected to implement a 25 basis point hike at its next meeting. The 10 year treasury has also surged to 5%, indicating the market is becoming more concerned of stagflation.
The main event of the day will be the consumer price index. A higher than expected inflation reading would aid the market's bets of a rate hike at the Fed's September meeting. A softer reading could reverse those expectations. The extended yield curve of the dollar is also giving the currency an added preference due to the fragile risk appetite caused by disrupted Middle Eastern energy supplies.
The ECB made two moves yesterday with a 25 basis point hike on its deposit rate to 2.5% and setting a forecasted growth rate of 0.9% for 2026. The ECB is also projecting average inflation of 3% for 2022 and 2.5% for 2027. For the ECB, even higher interest rates will help gel yield differential, but risk of weakening the economy further remains.
