Markets price at least one more Fed rate increase by year-end despite cooling inflation, bolstering the USD against the euro.
The US dollar extended gains as markets maintained expectations for at least one additional Federal Reserve rate hike by year-end, contrasting with a single anticipated move by the ECB to 2.5%. Revised GDP data showed a resilient US economy, with growth holding steady despite softer private consumption contributions of 40 basis points to the 2.1% expansion last quarter.
Lower oil prices and easing inflation expectations have not dented Fed rate hike bets, with markets still pricing a 2.5% terminal rate. The ECB, however, is seen delivering only one more increase, widening the policy divergence. Tech-driven capital expenditures, particularly in data processing equipment, contributed disproportionately to growth despite accounting for just 3% of GDP.
The dollar’s strength reflects sustained US economic momentum, even as debt-financed tech investment introduces potential risks. Inflation expectations have declined, but market pricing remains anchored to a hawkish Fed outlook.