Expectations of Fed and BoE Rate Hikes Lift Dollar and Pound

what happened

Market Talk, citing analysts at Citi, Convera, ING, Commerzbank and Schroders, reports that markets increasingly price in further monetary tightening. US jobs and inflation data came in stronger than forecast, so according to LSEG data investors almost fully expect a Fed rate increase of at least 25 basis points on December 10. The DXY dollar index trades near 102.9 after a 19-month high of 103.08. The euro fell to $1.1065, its lowest level in 18 months.

In the UK, third-quarter GDP grew 0.7%, faster than expected. LSEG data put the chance of a December Bank of England rate hike at 76%, up from 71%. ING analysts expect another hike in February. The yen holds near 159.65 per dollar, and Commerzbank believes Japan's Ministry of Finance has limited room to support it against dollar strength.

Separately, Market Talk notes that Ether fell 2.7% to $2,012.54, and that reports of a possible leadership change at Nvidia have not raised the cost of protecting its debt against default.

why it matters

For markets, the main theme is that interest rates in the US and UK are expected to rise further. That supports the dollar and the pound, weighs on the euro, and pressures short-dated Treasuries as their yields climb. Yen weakness also keeps intervention risk in focus for dollar-yen trading.

market impact

Dollar and pound: higher Fed and BoE rate-hike expectations support the currencies; euro and short US Treasuries under pressure

• ▲DXY pressure up — rising expectations of a Fed rate hike in December
• ▼EUR/USD pressure down — political turmoil in France and Ukraine tensions limit euro gains
• ▲GBP/USD pressure up — higher expectations of a Bank of England rate hike in December
• ▼US Treasuries pressure down — short-dated yields rise on expectations of Fed tightening

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