FUNDAMENTAL OVERVIEW USD: The US dollar continues to be supported following the hawkish Fed dot plot last week as the central bank’s tightening bias led to a hawkish repricing in interest rate expectations.
As a reminder, the Fed delivered a hawkish surprise by projecting a rate hike this year (the consensus was for no cuts or hikes)
The market increased rate hike bets with now 38 bps of tightening priced in by year-end. There’s a 32% chance of a hike already in July and 68% probability of a move in September. The economic data and financial markets will now guide the Fed as Warsh stated that “financial markets perform best when they react to incoming data and are less efficient when they have to ask how the Federal Reserve will react to the incoming data”.
He added that “financial markets are the most important source of information to guide the central bank”. Trump also posted on Truth Social and, unlike his usual stance under Fed Chair Powell, did not object to the Fed’s decision. In fact, he said that “rate hikes could happen,” which sounds like a green light for Warsh and the Fed to do whatever they deem necessary.