Hawkish Federal Reserve expectations gained momentum after strong October inflation prints, with some policymakers even leaving open the potential for a 50-basis-point rate hike. Goldman Sachs and other major brokerages now anticipate additional monetary tightening in both December and early next year. Meanwhile, the yen remains pressured by wide interest-rate differentials despite Japanese wholesale prices rising 7.1% year-on-year in October. Traders are focusing on an appearance by New York Fed President John Williams and remarks from Bank of Japan board member Toichiro Asada for future rate signals.
Key points
Growing expectations for Federal Reserve rate hikes continue to reinforce broad strength…: Growing expectations for Federal Reserve rate hikes continue to reinforce broad strength across the U.S. currency.
Significant monetary policy divergence between the Federal Reserve and the Bank of Japan…: Significant monetary policy divergence between the Federal Reserve and the Bank of Japan keeps the yen vulnerable to sustained selling.
Upcoming communications from central bank officials John Williams and Toichiro Asada will…: Upcoming communications from central bank officials John Williams and Toichiro Asada will serve as critical catalysts for foreign exchange markets.
Sources checked by our analysis pipeline: 1
The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, rose 0.63% to 102.85, its highest level since October 14.
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Traders ramped up bets on further Fed tightening after stronger-than-expected October inflation data and a series of hawkish remarks from US central bank officials, who expressed concern over stubborn inflation and left open the possibility of a larger 50-basis-point increase. Some major brokerages, including Goldman Sachs, now expect another hike early next year, in addition to one in December.
New York Fed President John Williams is set to appear on a panel late Thursday that will be closely watched given his "pre-October FOMC meeting views the Fed had time on rate hikes," said Gavin Friend, senior markets strategist at National Australia Bank, in a note.
"Fast forward two weeks and following a hotter than forecast October CPI report, Fed officials appear to be falling over themselves to talk up rate hikes," Friend said. "Any guidance from…
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