Markets price additional ECB and BoE tightening, lifting USD as investors anticipate Fed credibility-driven rate moves.
The US Dollar Index (DXY) remains supported as rising energy prices fuel expectations of further central bank tightening. Markets now price 75 basis points of additional hikes from both the European Central Bank and Bank of England, despite skepticism over the scale of moves.
Since the June FOMC meeting, two-year real USD swap rates have climbed 30 basis points, reflecting investor belief that the Federal Reserve will need to act to restore inflation-fighting credibility. While ING does not expect a Fed hike next week, the trend is seen as difficult to counter without a sharp drop in energy costs.
Light US data releases today, including July S&P PMIs and new home sales, are unlikely to shift sentiment. Geopolitical tensions, including threats of military action, may further support long dollar positions into the weekend.