Markets now price a 50% chance of a Fed rate hike by year-end amid persistent inflation and resilient US data.
The EUR/USD pair extended its decline as traders increased bets on Federal Reserve tightening, driven by rising Treasury yields and inflation concerns. A 50% probability of a rate hike by December is now priced in, up from earlier expectations of cuts or pauses.
Fed policymakers have shifted tone, dropping easing bias language and hinting at potential hikes if inflation remains elevated. Meanwhile, the ECB is seen as locked into a June rate hike, with markets pricing 70 bps of tightening. Geopolitical tensions in the Strait of Hormuz add further uncertainty, with prolonged closure risking higher oil prices and additional Fed pressure.
A resolution to the US-Iran standoff could ease oil prices and reduce rate hike expectations, potentially weighing on the USD. However, persistent inflation and strong economic data may keep the Fed on a hawkish path regardless.